At the Intersection of Incentive and Opportunity: Institutional Investors and Informed Trading

51 Pages Posted: 8 Sep 2018

See all articles by Cory A. Cassell

Cory A. Cassell

University of Arkansas

Tyler Kleppe

University of Arkansas

Andrew T. Pierce

University of Arkansas

Margaret Warren

University of Arkansas

Date Written: July 23, 2018

Abstract

We investigate institutional investors’ trading activity during the period preceding company disclosures regarding the effectiveness of internal controls over financial reporting. We find consistent evidence suggesting that certain institutional investors trade in advance of forthcoming internal control material weakness disclosures under Section 404(b) of the Sarbanes-Oxley Act. Specifically, our results suggest that post-Reg FD informed trading is evident only among institutional investors with both the opportunity and incentive to gather and develop private information. Our study is among the first to document the interaction between key institution level characteristics and portfolio-firm level characteristics that facilitate informed trading. Although private discussions between managers and investors are generally unobservable, we speculate that the informed traders in our setting become informed, at least in part, through private interactions with firm managers.

Keywords: Institutional Investors, Private Information, Internal Controls

JEL Classification: M41, M48

Suggested Citation

Cassell, Cory A. and Kleppe, Tyler and Pierce, Andrew T. and Warren, Margaret, At the Intersection of Incentive and Opportunity: Institutional Investors and Informed Trading (July 23, 2018). Available at SSRN: https://ssrn.com/abstract=3239633 or http://dx.doi.org/10.2139/ssrn.3239633

Cory A. Cassell

University of Arkansas ( email )

Business Bldg. 454
Fayetteville, AR 72701
United States

Tyler Kleppe (Contact Author)

University of Arkansas ( email )

Fayetteville, AR 72701
United States

Andrew T. Pierce

University of Arkansas ( email )

Fayetteville, AR 72701
United States

Margaret Warren

University of Arkansas ( email )

Fayetteville, AR 72701
United States

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