Sec Rule 10b5-1 and Insiders' Strategic Trade
Alan D. Jagolinzer
University of Colorado - Leeds School of Business
February 1, 2009
Management Science, February 2009
The SEC enacted Rule 10b5-1 to deter insiders from trading with private information, yet also protect insiders' preplanned, non-information-based trades from litigation. Despite its requirement that insiders plan trades when not privately informed, the Rule appears to enable strategic trade. Participating insiders' sales systematically follow positive and precede negative firm performance, generating abnormal forward-looking returns larger than those earned by non-participating colleagues. The observed association does not appear to be explained by market transaction disclosure response, "predictable" reversion following positive performance, or general periodic price declines. There is evidence, however, that a substantive proportion of randomly drawn plan initiations are associated with pending adverse news disclosures. There is also evidence that early sales plan terminations are associated with pending positive performance shifts, reducing the likelihood that insiders' sales execute at low prices. Collectively, this suggests that, on average, trading within the Rule does not solely reflect uninformed diversification.
Number of Pages in PDF File: 32
Keywords: Insider trading, Securities Exchange Act of 1934, diversification trade, planned trade, blackout windows
JEL Classification: K22, M52working papers series
Date posted: May 7, 2004 ; Last revised: February 9, 2010
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