At the Intersection of Incentive and Opportunity: Institutional Investors and Informed Trading
51 Pages Posted: 8 Sep 2018
Date Written: July 23, 2018
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: Suggested Citation