Abstract
Utilizing a new understanding of firm compliance responses to regulation, I find that Sarbanes-Oxley helped both identify and reduce abnormal returns to informed insider trading. The number of forms insiders file post-SOX increased by 175% per year, causing an 84% increase in firm compliance policies to handle the implicit costs to filing by selecting staff to oversee and orchestrate the trading of insiders. Insiders sign their own insider trading forms identify deviation from firm policy, and signal informed insider trading reaping abnormal annualized returns to their purchases (sales) of 9.6% (-10.8%). Using this novel measure to identify informed insider trading, Sarbanes-Oxley cuts abnormal returns nearly in half. I find that SOX does so by limiting insiders’ ability to sequence smaller trades multiple times, a previously undisclosed strategy. Sarbanes-Oxley’s insider trading provisions work as intended—to limit insiders from using their informational advantages to lucratively trade—and it does so by increasing both the amount and speed of disclosure.
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