Opportunistic Insider Research Articles

Monitoring from Afar: Do Foreign Institutional Investors Deter Insider Trading?

We examine whether foreign investors play a role in mitigating opportunistic insider trading. Using a novel global insider trading dataset containing 35,557 firms from 26 countries, we find that greater foreign institutional ownership significantly reduces insider trading profitability, above and beyond the effect of domestic institutional ownership. Using the exogenous variation in foreign institutional ownership induced by MSCI index reconstitution, we show that this effect is plausibly causal. Foreign institutions mitigate insider trading both by direct monitoring on insiders' illicit behavior and by facilitating short selling through security lending.

Corporate Governance and Insider Trading: Evidence from Malaysia

The collapse of prominent companies coupled with the increasing number of lawsuits against the directors of the companies for wrongdoing has raised concerns with insider trading activities. Insider trading does cause significant market reaction, whereby the insiders are able to earn significant cumulative abnormal returns for both purchases and sales. However, studies on the factors influencing insider trading are relatively scarce. This study aims to examine the factors that influence insider trading activities. Specifically, this study examines the relationship between four corporate governance factors, namely, board independence, board size, executive compensation and ownership concentration and insider trading activities in public listed companies in Malaysia. This study evinces that board size and executive compensation significantly influence insider purchases. On the other hand, significant market reaction caused by insider sales may be explained by other factors. Therefore, future studies could be carried out on other factors that may influence opportunistic insider sales. This study also found evidence against the semistrong form Efficient Market Hypothesis theory that suggests insiders cannot earn abnormal returns in a semi-strong efficient market using public information

Does Board Independence Mitigate Potential Adverse Effects of Private In-House Meetings?

We examine the effectiveness of board independence in promoting positive aspects of private in-house meetings between management and investors while curbing opportunistic insider trading activities around these meetings. Consistent with private meetings having benefits, we find a positive association between board independence and (i) private meeting frequency, and (ii) timeliness of disclosures to the public. Consistent with reducing the potential costs of private meetings, we find an association between board independence and (i) relatively subdued market reactions to these private meetings, (ii) reduced insider trading frequency around private in-house meetings, and (iii) reduced insider trading profitability around private in-house meetings -- and in general among sample firms.

Insider Trading Ahead of Cyber Breach Announcements

Stock market reactions to cybersecurity breach announcements are generally negative. In virtually all cases, information asymmetry exists between firm management and investors between the date of cybersecurity breach discovery and the public announcement of the breach. We find significant evidence of opportunistic insider trading, with insiders saving an average of $35,009 due to their timely selling in the three months prior to the announcement of a cybersecurity breach. Late filing violations by insiders, which are indicative of stealth trading, are more likely to occur near the announcement of a cyber breach. We also find that the bulk of opportunistic trading tends to occur 55 to 72 days before the public announcement. The results lend support to the SEC’s recently announced goal of tightening restrictions on insider trading ahead of cyber breach announcements, and we make several policy recommendations based on our findings.

Aggregate Opportunistic Insider Trading and Market Return Predictability

Aggregate Opportunistic Insider Trading and Market Return Predictability

The Persistence of Opportunistic Insider Trading

AbstractWe study the drivers of persistent insider trading profitability by examining the trades of insiders whose past trades have been profitable. We find that the current transactions of these persistently profitable (PP) insiders better predict firm performance than those of other insiders. The relative abnormal performance is more pronounced for trades of insiders who are managers rather than large shareholders or unaffiliated insiders and for trades in firms with weaker governance and greater information asymmetry. The trades of PP insiders also better predict earnings surprises, major corporate news, and analyst revisions. Collectively, these results indicate that PP insider transactions provide valid signals regarding future firm performance and that persistence in profitability is driven by informational advantages.

Insider Selling on Public Information: Evidence from Competition with Short Sellers

This paper studies patterns of insider trading in the presence of foreknowledge of long-term material information and short-term mispricing. Using a sample of U.S. stocks in the period after increased regulatory restriction we document that both insiders' purchases and sales predict future returns. Conditioning on the short-selling activity after earnings announcements as a proxy for demand of arbitrageurs who trade to exploit short-term mispricing, we show that insiders profit from selling because of their ability to exploit mispricing after public news releases. Insiders' purchases, in contrast, do exploit insiders' foreknowledge of long-term material information. Most of the informed insider trading comes from opportunistic insider transactions. Our paper contributes to the discussion about (in)effectiveness of regulatory restrictions concerning insider trading.

Insider trading and response to earnings announcements: the impact of accelerated disclosure requirements

This paper contributes to the debate on the consequences of increased disclosure regulation by investigating the effects of expedited reporting requirements of Form 4 filings, mandated by the Sarbanes–Oxley Act (SOX), on the market response to earnings announcements. We first confirm that SOX reduces opportunistic insider trading without deterring insider trading due to diversification needs, and that post-SOX, opportunistic insider trades more strongly reveal upcoming earnings surprises. We then document that, at the earnings announcement date, earnings response coefficients (ERCs) are lower when earnings are preceded by opportunistic insider trades. We conclude that accelerated disclosures of insider transactions mandated by SOX lend to more informationally efficient prices prior to earnings announcements. Our findings stand as one piece of evidence suggesting positive externalities from recent Securities and Exchange Commission (SEC) disclosure regulation and add to the scarce evidence on the consequences of changes in Form 4 filing requirements.

Corruption culture and corporate misconduct

Despite significant interest in corporate culture, there is little empirical research on its role in influencing corporate misconduct. Using cultural background information on key company insiders, I construct a measure of corporate corruption culture, capturing a firm's general attitude toward opportunistic behavior. Firms with high corruption culture are more likely to engage in earnings management, accounting fraud, option backdating, and opportunistic insider trading. I further explore the inner workings of corruption culture and find evidence that it operates both as a selection mechanism and by having a direct influence on individual behavior.

Insider Sales under the Threat of Short Sellers: New Hypothesis and New Tests

Using the Regulation SHO program as a quasi-experiment, we document that the threat of short selling has a negative effect on the volume of opportunistic insider selling and a positive effect on its profitability for each transaction. These effects are stronger among firms with higher litigation risk, greater media coverage, and executives who have more of their firms’ stock-related holdings. We further find robust evidence when we extend the analyses to short selling deregulations in the Chinese and Hong Kong stock exchanges. Overall, our findings suggest that short sellers play a disciplinary role in opportunistic insider selling.

Corruption Culture and Corporate Misconduct

Despite significant interest in corporate culture, there is little empirical research on its role in influencing corporate misconduct. Using cultural background information on key company insiders, I construct a measure of corporate corruption culture, capturing a firm’s general attitude toward opportunistic behavior. Firms with high corruption culture are more likely to engage in earnings management, accounting fraud, option backdating, and opportunistic insider trading. I further explore the inner workings of corruption culture and find evidence that it operates both as a selection mechanism and by having a direct influence on individual behavior.

Insider Trading and Response to Earnings Announcements: The Impact of Accelerated Disclosure Requirements

This paper contributes to the debate on the consequences of increased disclosure regulation by investigating the effects of expedited reporting requirements of Form 4 filings, mandated by the Sarbanes-Oxley Act (SOX), on the market response to earnings announcements. We first confirm that SOX reduces opportunistic insider trading without deterring insider trading due to diversification needs, and that post-SOX, opportunistic insider trades more strongly reveal upcoming earnings surprises. We then document that, at the earnings announcement date, earnings response coefficients (ERCs) are lower when earnings are preceded by opportunistic insider trades. We conclude that accelerated disclosures of insider transactions mandated by SOX lend to more informationally efficient prices prior to earnings announcements. Our findings stand as one piece of evidence suggesting positive externalities from recent Securities and Exchange Commission (SEC) disclosure regulation and add to the scarce evidence on the consequences of changes in Form 4 filing requirements.

Strategic Disclosure of 10b5-1 Trading Plans

Can voluntary disclosure be used to enhance insiders’ strategic trade while providing legal cover? We investigate this question in the context of 10b5-1 trading plans. Prior literature suggests that insiders lose strategic trade value if their planned trades are disclosed. But disclosure might enhance strategic trade because courts can only consider publicly available evidence from defendants at the motion to dismiss phase of trial. This practice can enhance legal protection for firms that disclose planned trades, especially those disclosing detailed information. Consistent with increased legal protection, we find that voluntary disclosure of planned trades increases with firm litigation risk and potential gains to insiders’ trades. We also find that insider sales and abnormal returns are higher for disclosed plans, especially those that articulate specific plan details. This suggests that voluntary disclosure, which is conventionally thought to reduce information asymmetries, can create legal cover for opportunistic insider trading.

Contracting under asymmetric information: Evidence from lockup agreements in seasoned equity offerings

We document the frequent use of lockup agreements in seasoned equity offerings (SEOs) and examine the determinants of their use, duration, and early release. We find that the likelihood of an SEO lockup and its duration are positively related to issuer information asymmetry measures. Lockup duration is negatively related to underwriter spreads and underpricing, indicating that lockups lower expected flotation costs. Lockups are frequently released early following share prices rises. We conclude that lockups represent a contracting solution to asymmetric information and agency problems that plague equity issues by helping to insure SEO quality and deter opportunistic insider trading.

Opportunistic insider trading

This study proposes a simple framework to disentangle insiders' opportunistic trade from liquidity trade. An opportunistic trade occurs when the probability of informed trading and the speed of convergence to market efficiency increase in a month of an insider transaction. Using Thailand Securities Exchange Commission (SEC) insider filing reports during 2002 to 2008 we find an average insider achieves merely 0.64% and 0.32% in a month after an insider purchase and sell but an opportunistic portfolio yields approximately 2%.

Internal Control Effectiveness and Insider Trading

We predict a negative relationship between internal control effectiveness and opportunistic insider trading based on agency theories. Empirical evidence on the profitability, intensity and timing of insider trades supports the prediction. Insider trading profitability is higher for firms with internal control deficiencies than those without. Insider trading profitability decreases sharply after internal control deficiencies are exposed and decreases further when those deficiencies are remediated. Insider trading intensity is higher for firms with internal control deficiencies, but it drops significantly when such deficiencies are exposed. After internal control problems are exposed, insider trades become more concentrated in short windows immediately following earnings announcements, consistent with firms adopting blackout policies to specifically restrict insider trading as a part of their effort to improve internal control. Lastly, the increase in the likelihood of blackout policies is more pronounced for firms that have more serious insider trading problems based on ex ante classification.

Insider trading by directors and seniors officers before seasoned equity offerings

An important aspect of corporate governance is how directors discharge their duty to shareholders as monitors of management’s opportunistic behavior. The insider trading by officers and directors before seasoned equity offerings (SEO) provide an opportunity to examine this issue, because insiders’ sales of the firm’s stock are incongruent with the objective of the firm to maximize the proceeds of the SEO. Since the market is aware that firms attempt to inflate their proceeds by managing earnings upwards, these trades may signal that the stock is overvalued. In this study, we compare the earnings management activity and the corresponding market response to earnings management and sales by senior officers and directors. We study a sample of 233 firms that conducted SEOs in the 1987-2004 period and either their directors and/or their senior officers traded in the firm’s shares. We find that 15% have insider trading by directors only, and 85% by both directors and senior officers. The market discounts the insider trading at the issuance date (the discount increases in the volume of insiders sales), but it treats insider trading by directors as a favorable signal that reduces the discount. Our study then identifies two ways directors monitor opportunistic insider trading before SEO. One is to ban it, as evident by the fact that under our selection criteria, 791 firms conducted SEOs in the 1987-2004 period. The other is to trade too as a positive signal to the market.

Regulated and unregulated insider trading around earnings announcements

This paper analyses insider trading behaviour around annual and interim earnings announcements during changing legislative environments in Sweden from 1980 to 2003. Using a unique data set, we are able to explore the nature of insider trading patterns from unregulated to strongly regulated insider trading markets. We find limited evidence of opportunistic insider trading. Insiders seem to be reluctant to sell stocks before positive earnings announcements. They also tend to time their trades in conjunction with an immediate post-announcement period, i.e. “safety trading”, which becomes more evident within stronger legislation environments. Some support for contrarian trading behaviour is also found.

Managerial Insider Trading and Opportunism

This paper examines whether managers engage in opportunistic insider trading by measuring how their net open market purchases and holdings of own company stock change around acquisitions, seasoned equity offerings and share repurchases after controlling for their share and option holdings and noninformational motives for trading. On average, managers abnormally increase sales and reduce holdings around stock acquisitions and seasoned equity offerings but not around cash acquisitions and share repurchases. However the typical manager does not experience an economically significant change in ownership; more material ownership changes are limited to the subsets of the sample. These results suggest that the evidence for managerial opportunism is modest in magnitude and not pervasive in the sample.

Market Misvaluation and Merger Activity: Evidence from Managerial Insider Trading

This paper tests the empirical predictions of the market misvaluation theory of mergers advanced by Rhodes-Kropf and Vishwanathan (2004) and Shleifer and Vishny (2003) using data on managerial insider trading around merger announcements. I first present evidence of opportunistic insider trading by acquirer-firm managers prior to mergers. Acquirer-firm managers abnormally increase their selling prior to stock mergers suggesting those deals might be overvalued. I then construct a misvaluation measure based on the magnitude and direction of managerial trades prior to the merger and use it to test the empirical predictions of the misvaluation theory. To the extent that managerial trading is motivated by misvaluation, I find consistent differences in the merger characteristics and long-run returns of overvalued and undervalued firms. Overvalued firms are more likely to conduct stock mergers, have high pre-merger but negative post-merger excess long-run returns and receive negative market reaction to their acquisition announcements. My results support the theory that market misvaluation affects merger activity.