Impact of the Galleon Case on Insider Trading Prior to Company Issued Guidance

Abstract

The increased government efforts to pursue insider trading charges against Galleon Group and the subsequent increase in penalties for violating insider trading laws can deter managers from leaking information and deter investors from capitalizing on leaked information before earnings guidance announcements. We find strong support for our hypothesis, as information leakages prior to positive and neutral managerial guidance are significantly reduced since the inception of the Galleon case, even after controlling for other variables. We also find that the proportional leakage (measured in proportion to the total information contained within the guidance event) is significantly reduced for positive, negative, and neutral guidance, even when controlling for other variables.

Keywords: Insider trading; Information leakage; Management guidance

JEL Classification: G14