It is Easy to Be Brave from a Safe Distance: Proximity to the SEC and Insider Trading

Abstract

We use hand-collected data from SEC's litigation releases for insider trading violations to examine the effect of geographic distance on its enforcement activities and insider trading activities. First, we find that the SEC is more likely to investigate companies that are closer to its offices. Second, we find that illegal insider trading increases with a company's distance from an SEC office. Lastly, we utilize the closure of SEC offices as exogenous shocks to geographic proximity and find that insider trading at nearby companies increase significantly compared with trading at otherwise similar companies not affected by the closures. Overall, our findings suggest that information asymmetry and resource constraints prevent regulators from monitoring effectively.

Keywords: SEC; Enforcement; Financial Misconduct; Insider Trading; Geographic Proximity

JEL Classification: K42; G18; G38; M41; M48