The Effect of Firm-Imposed Insider Trading Restrictions on Cost of Equity Capital

Posted: 12 Jan 2009

Date Written: January 9, 2009


This paper examines the impact of self-imposed blackout period insider trading restrictions on a firm's cost of equity capital. We investigate both cross-sectional differences between firms with blackout period restrictions versus those without such restrictions as well as the time-series impact of firms initiating such a restriction. Cross-sectionally, we find that firms with blackout period trading restrictions have lower cost of equity capital. Using a time-series analysis, we find that when firms initiate such a restriction, their costs of equity capital subsequently drop. In addition to the direct impact of the restriction, we also examine how the restriction affects the analyst following and management earnings forecast practice and how these changes in the information environment indirectly influence the cost of equity capital. We do not find a significant change in either analyst following or management forecast practices after the initiation of the blackout period restriction.

Keywords: insider trading restrictions; cost of capital; analyst coverage, management forecast

JEL Classification: D82, G30

Suggested Citation

Choy, Hiu Lam and Silvers, Roger, The Effect of Firm-Imposed Insider Trading Restrictions on Cost of Equity Capital (January 9, 2009). Available at SSRN:

Hiu Lam Choy (Contact Author)

Drexel University ( email )

3141 Chestnut St
Philadelphia, PA 19104
United States

Roger Silvers

University of Utah ( email )

1655 E Campus Dr
SLC, UT 01003
United States


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