Undisclosed SEC Investigations

42 Pages Posted: 10 Jan 2020 Last revised: 12 Aug 2020

See all articles by Terrence Blackburne

Terrence Blackburne

Oregon State University

John D. Kepler

Stanford Graduate School of Business

Phillip J. Quinn

University of Washington Foster School of Business

Daniel J. Taylor

The Wharton School, University of Pennsylvania

Date Written: April 25, 2020


One of the hallmarks of the SEC’s investigative process is that it is shrouded in secrecy––only the SEC staff, high-level managers of the company being investigated, and outside counsel are typically aware of active investigations. We obtain novel data on all investigations closed by the SEC between 2000 and 2017––data that was heretofore non-public––and find that such investigations predict economically material declines in future firm performance. Despite evidence that the vast majority of these investigations are economically material, firms are not required to disclose them, and only 19% of investigations are initially disclosed. We examine whether corporate insiders exploit the undisclosed nature of these investigations for personal gain. Despite the undisclosed and economically material nature of these investigations, we find that insiders are not abstaining from trading. In particular, we find a pronounced spike in insider selling among undisclosed investigations with the most severe negative outcomes; and that abnormal selling activity appears highly opportunistic and earns significant abnormal returns. Our results suggest that SEC investigations are often undisclosed, economically material non-public events and that insiders are trading in conjunction with these events.

Keywords: SEC investigations, private information, managerial opportunism, insider trading, accounting fraud

JEL Classification: G34, G38, J38, K14, K15, K22, M41, M48

Suggested Citation

Blackburne, Terrence and Kepler, John and Quinn, Phillip J. and Taylor, Daniel, Undisclosed SEC Investigations (April 25, 2020). Management Science, Forthcoming, Jacobs Levy Equity Management Center for Quantitative Financial Research Paper, Available at SSRN: https://ssrn.com/abstract=3507083 or http://dx.doi.org/10.2139/ssrn.3507083

Terrence Blackburne

Oregon State University ( email )

Corvallis, OR 97331
United States

John Kepler (Contact Author)

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

Phillip J. Quinn

University of Washington Foster School of Business ( email )

224 Mackenzie Hall, Box 353200
Seattle, WA 98195-3200
United States

Daniel Taylor

The Wharton School, University of Pennsylvania ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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