The 8-K Trading Gap

48 Pages Posted: 9 Sep 2015 Last revised: 1 Aug 2016

Alma Cohen

Tel Aviv University - Eitan Berglas School of Economics; Harvard Law School; National Bureau of Economic Research (NBER)

Robert J. Jackson Jr.

Columbia Law School

Joshua Mitts

Columbia Law School; Columbia University - Columbia Business School

Date Written: September 7, 2015

Abstract

When a significant event occurs at a publicly traded company, federal law requires the firm to disclose this information to investors in a securities filing known as a Form 8-K. But the firm need not disclose immediately; instead, SEC rules give companies four business days after the event occurs within which to file an 8-K. These rules thus create a period during which market-moving information is known by those inside the firm but not most public-company investors — a period we call the “8-K trading gap.” In this Article, we study how corporate insiders trade their company’s stock during the 8-K trading gap.

We develop a unique dataset of 15,419 Form 8-Ks with trades by insiders during this gap. We identify systematic abnormal returns of 42 basis points on average, per trade, from trades by insiders during the 8-K gap. When insiders engage in an unusual transaction during the gap — open-market purchases of their own company’s stock — they earn even larger abnormal returns of 163 basis points. We also show that, when they engage in such purchases, insiders are correct about the directional impact of the 8-K filing more often than not — and that the probability that this finding is the product of random chance is virtually zero.

To examine whether it is the expertise of the insiders, or the value associated with the information, that drives insider returns, we then focus on a type of 8-K that reveals positive information: those that announce new agreements with the company’s business partners. We show, without reference to any specific insider transaction, that a trading strategy of buying on the date such an agreement is struck and selling immediately before the agreement is disclosed yields, on average, abnormal returns of 35.4 basis points. We also demonstrate that insiders are more likely to engage in open market purchases of their own company’s stock when the firm is about to reveal new agreements with customers and suppliers. In light of the potential concerns raised by these findings, lawmakers should reconsider the effects of information-forcing rules such as those governing Form 8-K on the incidence and profitability of trading by insiders.

Keywords: Insider Trading, Securities Law, Corporate Law, Corporate Governance

JEL Classification: C1, C4, G13, G14, G34, G38, K22, K4

Suggested Citation

Cohen, Alma and Jackson, Robert J. and Mitts, Joshua, The 8-K Trading Gap (September 7, 2015). Columbia Law and Economics Working Paper No. 524. Available at SSRN: https://ssrn.com/abstract=2657877 or http://dx.doi.org/10.2139/ssrn.2657877

Alma Cohen

Tel Aviv University - Eitan Berglas School of Economics ( email )

Ramat Aviv, Tel Aviv, 69978
Israel

Harvard Law School ( email )

Cambridge, MA 02138
United States
(617) 496-4099 (Phone)
(617) 812-0554 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Robert J. Jackson Jr. (Contact Author)

Columbia Law School ( email )

435 West 116th Street
New York, NY 10025
United States

Joshua Mitts

Columbia Law School ( email )

435 West 116th Street
New York, NY 10025
United States

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

Paper statistics

Downloads
924
Rank
18,939
Abstract Views
6,280