The Effect of Voluntary versus Mandatory Adoption of Trading Policies on the Returns to Insider Trades
34 Pages Posted: 31 Jan 2015
Date Written: November 23, 2014
The insider trading policy is an aspect of a firm’s internal governance which ensures corporate transparency is maintained and promotes investor confidence. We examine the effect of trading policies on the returns to trades conducted by corporate insiders in a period where the adoption of a policy is recommended versus another where the adoption is mandatory. In the former period, we find the requirement to notify the firm prior to trading does not lower profits to insider trades made on days outside the permitted trading windows. Where adoption of a policy is mandatory, returns to insider trades made during the restricted windows are higher and the requirement to notify prior to trading significantly reduces the profits. While all firms are required to adopt a policy, the adoption of a more restrictive trading policy is not “cheap talk”.
Keywords: Insider trading policy, permitted trading periods, restricted trading periods, trading returns, insider holdings, corporate governance
JEL Classification: G14, G34
Suggested Citation: Suggested Citation