Insider Trading: What Really Protects U.S. Investors?

Abstract

I examine the ability of the U.S. investor protection regime to limit insider trading returns, absent Section 16(b) of the Securities Exchange Act of 1934 (the short-swing rule). I find that, in this setting, U.S. insiders execute short-swing trades that (i) beat the market by about 15 basis points per day and (ii) systematically divest ahead of disappointing earnings announcements. These results indicate that the bright-line rule restricting short-horizon roundtrip insider trading plays a substantial role in protecting outside investors from privately informed insiders in the United States.