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

Published online by Cambridge University Press:  16 April 2019

Roger M. White Open the ORCID record for Roger M. White [Opens in a new window]
Roger M. White*
Affiliation:
White, [email protected], Arizona State University W. P. Carey School of Business
*
White (corresponding author), [email protected]
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Abstract

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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 approximately 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 round-trip insider trading plays a substantial role in protecting outside investors from privately informed insiders in the United States.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 55 , Issue 4 , June 2020 , pp. 1305 - 1332
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2019

Footnotes

For feedback that greatly improved this manuscript, I thank my dissertation committee members at Emory University: Ilia Dichev (chair), Clifton Green, and Ed Owens. I am also grateful for helpful feedback from Bernard Black (the referee), Olivia Burnsed, Jivas Chakravarthy, Suman Chattopadhyay, Jesse Ellis, Jarrad Harford (the editor), Bright Hong, In Do Hwang (discussant), Weishi Jia, Lisa LaViers, Melanie Millar, Robert Mocadlo, Shiva Rajgopal, Tom Shohfi, Han Stice, Charles Trzcinka, Devin Williams, Dan Zhou, and workshop participants at Emory University, Yale University, Southern Methodist University, Penn State University, Arizona State University, the University of Illinois, and the 2016 Midwest Finance Association annual meeting. Chip Presten (Baker, Donelson, Bearman, Caldwell & Berkowitz) and Urska Velikonja (Georgetown University School of Law) also provided their invaluable institutional knowledge, for which I am thoroughly indebted and appreciative.

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