Regulatory Reform and Opportunistic Insider Trading

Abstract

We provide the first large-scale quasi-experimental evidence on the effectiveness of tightening insider trading regulation. The SEC in 2022 eliminated several loopholes in the regulation of 10b5-1 trading plans. Linking 158,000 stock sales by company executives to plan adoption dates, we document substantial pre-reform abnormal returns for “loophole trades” including single-trade plans and sales shortly after plan adoption. Although the reform shut the loopholes, executives’ abnormal returns did not decline. Plausible mechanisms include self-policing before the reform and shifting opportunistic trading toward the rule’s margin afterward. Our results highlight limits of legal design aimed at reducing insider opportunism.

Keywords: Insider Trading, Rule 10b5-1, Regulation, Opportunism, Corporate Governance, Enforcement, SEC, Executive Compensation

JEL Classification: G14, G18, K22, G38