The Deterrence Effect of SEC Enforcement Intensity on Illegal Insider Trading: Evidence from Run-up before News Events

59 Pages Posted: 14 Mar 2011 Last revised: 26 Jun 2017

See all articles by Diane Del Guercio

Diane Del Guercio

University of Oregon, Lundquist College of Business; European Corporate Governance Institute (ECGI)

Elizabeth R. Odders-White

University of Wisconsin - Madison - Department of Finance, Investment and Banking

Mark Ready

University of Wisconsin Madison

Date Written: June 20, 2017

Abstract

We examine whether public enforcement of U.S. insider trading laws affects price discovery. Examining insider trading civil cases filed by the SEC from 2003 to 2011, we find that the price impact on insider trading days is much smaller than the effect documented by Meulbroek (1992) for the 1980s, consistent with increased fear of prosecution. Moreover, we find that pre-announcement anticipatory run-up in comprehensive samples of takeover bids and earnings announcements is negatively related to resource-based measures of public enforcement intensity, suggesting that aggressive SEC enforcement deters illegal activity. In addition, we find that quoted bid-ask spreads are negatively related to SEC enforcement intensity, suggesting greater enforcement improves liquidity. Moreover, the negative and significant relation between run-up and SEC enforcement intensity persists after controlling for quoted spreads.

Keywords: mergers, takeover bids, earnings announcements

Suggested Citation

Del Guercio, Diane and Odders-White, Elizabeth R. and Ready, Mark, The Deterrence Effect of SEC Enforcement Intensity on Illegal Insider Trading: Evidence from Run-up before News Events (June 20, 2017). Journal of Law and Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1784528 or http://dx.doi.org/10.2139/ssrn.1784528

Diane Del Guercio

University of Oregon, Lundquist College of Business ( email )

Lundquist College of Business
1208 University of Oregon
Eugene, OR 97403
United States
541-346-5179 (Phone)
541-346-3341 (Fax)

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Elizabeth R. Odders-White (Contact Author)

University of Wisconsin - Madison - Department of Finance, Investment and Banking ( email )

975 University Avenue
Madison, WI 53706
United States
608-263-1254 (Phone)
608-265-4195 (Fax)

Mark Ready

University of Wisconsin Madison ( email )

5274B Grainger Hall
975 University Ave
Madison, WI 53706
United States
6082625226 (Phone)

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