How Do Insider Trading Policies Affect the Information Content of Insider Trades?

Abstract

We examine how firm-imposed trading policies affect returns to trades conducted by corporate insiders. A firm’s insider trading policy is a specific aspect of corporate governance which ensures and promotes ethical and responsible decision making so that investor confidence and corporate transparency is maintained. A detailed policy that reinforces the definition and reporting of trading by insiders and the enforcement of restricted trading periods is predicted to affect the firm’s information environment more than less detailed policies. Our results indicate lower returns to insider sales in such firms. However, when firms imposed restrictions on the timing of trades, insiders who buy shares within these restricted periods still earn higher returns compared to other purchases outside these times. These findings suggest that the various aspects of the trading policy affect the information environment and therefore returns to trades differently.

Keywords: trading policy, insider trading, corporate governance

JEL Classification: G14, G32