Does timely reporting of insider trading erode insiders’ trading profits? 

Abstract

This paper examines whether and how timely reporting of insider trading affects insider trading profits. Guided by an analytical model, we predict that timely reporting of insider trading can increase insider trading profits through better coordination of such trading. Studying the accelerated reporting of insider transactions in Form 4 under Section 403 of the Sarbanes-Oxley (SOX) Act of 2002, we find evidence that the daily insider trading profits increase by about 0.081% after SOX, representing about 29% of the standard deviation of trading profits. The increase in profits exhibits a hump-shaped relation with the internal information asymmetry among insiders and is more pronounced among insiders with more social connections. We find no evidence of changes in trading profits for transactions reported in Form 5, further validating our results. Overall, our results suggest that timelier reporting of insider trading may increase insider trading profits through improved trading coordination.

Keywords: Insider trading, Accelerated reporting, Security regulation., Coordination, Collusive trading

JEL Classification: G14; G30; K22