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Hiding in Plain Sight: Can Disclosure Enhance Insiders’ Trade Returns?

33 Pages Posted: 27 May 2008 Last revised: 5 Aug 2012

M. Todd Henderson

University of Chicago - Law School

Alan D. Jagolinzer

University of Cambridge Judge Business School

Karl A. Muller

Pennsylvania State University - Department of Accounting

Date Written: August 2012

Abstract

Can voluntary disclosure be used to enhance insiders’ strategic trade while providing legal cover? We investigate this question in the context of 10b5-1 trading plans. Prior literature suggests that insiders lose strategic trade value if their planned trades are disclosed. But disclosure might enhance strategic trade because courts can only consider publicly available evidence from defendants at the motion to dismiss phase of trial. This practice can enhance legal protection for firms that disclose planned trades, especially those disclosing detailed information. Consistent with increased legal protection, we find that voluntary disclosure of planned trades increases with firm litigation risk and potential gains to insiders’ trades. We also find that insider sales and abnormal returns are higher for disclosed plans, especially those that articulate specific plan details. This suggests that voluntary disclosure, which is conventionally thought to reduce information asymmetries, can create legal cover for opportunistic insider trading.

Keywords: Rule 10b5-1, voluntary disclosure, insider trading

JEL Classification: D82, G38, K22, M41, M45, M52

Suggested Citation

Henderson, M. Todd and Jagolinzer, Alan D. and Muller, Karl A., Hiding in Plain Sight: Can Disclosure Enhance Insiders’ Trade Returns? (August 2012). U of Chicago Law & Economics, Olin Working Paper No. 411; CLEA 2008 Meetings Paper; Rock Center for Corporate Governance at Stanford University Working Paper No. 7. Available at SSRN: https://ssrn.com/abstract=1137928 or http://dx.doi.org/10.2139/ssrn.1137928

M. Todd Henderson

University of Chicago - Law School ( email )

1111 E. 60th St.
Chicago, IL 60637
United States
773-834-4168 (Phone)
773-702-0730 (Fax)

Alan Jagolinzer (Contact Author)

University of Cambridge Judge Business School ( email )

Trumpington Street
University of Cambridge
Cambridge, CB2 1AG
United Kingdom

Karl Muller

Pennsylvania State University - Department of Accounting ( email )

Smeal College of Business
384 Business Building
University Park, PA 16802-3306
United States
814-865-0202 (Phone)
814-863-8393 (Fax)

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