Insightful Insiders? Insider Trading and Stock Return around Debt Covenant Violation Disclosures

65 Pages Posted: 3 Oct 2010 Last revised: 21 Jun 2012

Paul A. Griffin

University of California, Davis - Graduate School of Management; University of California, Davis

David H. Lont

University of Otago - Department of Accountancy and Finance

Kate McClune

University of Otago

Multiple version iconThere are 2 versions of this paper

Date Written: June 14, 2012

Abstract

This paper examines insider trading around first-time debt covenant violation disclosures in SEC filings, and is interesting from a research and regulatory standpoint for three reasons – delay and infrequency of a first-time disclosure, lack of attention to covenant disclosures by regulators, and a dearth of research. We document net insider selling in the 12 months before a debt covenant violation disclosure and net insider buying up to 12 months after disclosure. This net insider selling leads investors’ negative returns before violation disclosure. Net buying also leads investors’ positive returns after disclosure. We also show that net insider selling in a narrow (one to two month) window around the covenant violation disclosure associates predictably with investors’ price response in that same window.

Keywords: Insider trading, Debt covenant violation disclosure, SEC regulation, Insider trading enforcement, Event study

JEL Classification: G14, G32, G38, M41, M48, K22, K42

Suggested Citation

Griffin, Paul A. and Lont, David H. and McClune, Kate, Insightful Insiders? Insider Trading and Stock Return around Debt Covenant Violation Disclosures (June 14, 2012). UC Davis Graduate School of Management Research Paper No. 06-12. Available at SSRN: https://ssrn.com/abstract=1685973 or http://dx.doi.org/10.2139/ssrn.1685973

Paul A. Griffin (Contact Author)

University of California, Davis - Graduate School of Management ( email )

3102 Gallahger Hall
Davis, CA 95616
United States
(530) 752-7372 (Phone)
(425) 799-4143 (Fax)

HOME PAGE: http://www.gsm.ucdavis.edu/griffin/

University of California, Davis ( email )

3102 Gallahger Hall
Davis, CA 95616
United States
(530) 752-7372 (Phone)
(425) 799-4143 (Fax)

HOME PAGE: http://www.gsm.ucdavis.edu/griffin/

David H. Lont

University of Otago - Department of Accountancy and Finance ( email )

Box 56
Dunedin, Otago 9054
New Zealand
+64 3 479 8119 (Phone)
+64 3 479 8171 (Fax)

HOME PAGE: http://www.business.otago.ac.nz/acty/

Kate McClune

University of Otago ( email )

P.O. Box 56
Dunedin, Otago
New Zealand

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