Learning to Play by the Disclosure Rules: Accuracy of Insider Reports in Canada, 1996-2010

Abstract

Insiders of Canadian reporting issuers are required to file public reports when they acquire, buy, or sell securities of that reporting issuer. These public reports must be filed using a prescribed form and must be filed within a specific time frame. Failure to file these public reports or filing with inaccurate information constitutes an offence under securities law. The two main objectives served by these reporting rules are: (1) primarily as a regulatory tool to detect or prevent the improper use of undisclosed information by insiders; and (2) to increase market efficiency by providing investors with information concerning the trading activities of an issuer. These objectives are dependent on compliance with the rules, yet no information regarding compliance exists. To investigate compliance a secondary source of information to verify the information provided in public reports must exist. In Canada, the CEO and the top four highest paid executives must report detailed information regarding their compensation, including stock option awards, in the annual report to shareholders. We collect information on stock option grants for these individuals for a sample of Canadian public companies for the period 2003-2011 and compare this information to that provided in the public reports. We find that while the majority of executives properly and accurately file public reports, a significant minority fail to file or file inaccurate information. We consider the consequences of this finding and suggest ways to improve the quality of insider reporting in Canada.