Insider Trading Ahead of Cyber Breach Announcements

43 Pages Posted: 26 Jul 2018 Last revised: 6 Jan 2020

See all articles by Zhaoxin Lin

Zhaoxin Lin

Iowa State University

Travis Sapp

Iowa State University - Department of Finance

Jackie Rees Ulmer

Iowa State University

Rahul Parsa

Iowa State University

Date Written: December 17, 2019

Abstract

Stock market reactions to cybersecurity breach announcements are generally negative. In virtually all cases, information asymmetry exists between firm management and investors between the date of cybersecurity breach discovery and the public announcement of the breach. We find significant evidence of opportunistic insider trading, with insiders saving an average of $35,009 due to their timely selling in the three months prior to the announcement of a cybersecurity breach. Late filing violations by insiders, which are indicative of stealth trading, are more likely to occur near the announcement of a cyber breach. We also find that the bulk of opportunistic trading tends to occur 55 to 72 days before the public announcement. The results lend support to the SEC’s recently announced goal of tightening restrictions on insider trading ahead of cyber breach announcements, and we make several policy recommendations based on our findings.

Keywords: Insider Trading, Data Breach, Opportunistic Trading, SEC Enforcement Action

JEL Classification: G14, K24, G30

Suggested Citation

Lin, Zhaoxin and Sapp, Travis and Rees Ulmer, Jackie and Parsa, Rahul, Insider Trading Ahead of Cyber Breach Announcements (December 17, 2019). Journal of Financial Markets, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3205489 or http://dx.doi.org/10.2139/ssrn.3205489

Zhaoxin Lin (Contact Author)

Iowa State University ( email )

IA
United States

Travis Sapp

Iowa State University - Department of Finance ( email )

3362 Gerdin Business Bldg.
Ames, IA 50011-1350
United States
515-294-2717 (Phone)
515-294-3525 (Fax)

Jackie Rees Ulmer

Iowa State University ( email )

IA
United States

Rahul Parsa

Iowa State University ( email )

613 Wallace Road
Ames, IA 50011-2063
United States

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