Undisclosed SEC Investigations

35 Pages Posted: 10 Jan 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

Wharton School, University of Pennsylvania

Date Written: December 19, 2019

Abstract

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 the targets of all SEC investigations closed between 2000 and 2017 –– data that was heretofore non-public –– and find that such investigations portend economically meaningful declines in firm performance. Despite the materiality of these investigations, firms are not required to disclose them, and only 19% of targeted firms initially disclose the investigation. We examine whether corporate insiders exploit the undisclosed nature of these investigations for personal gain. We find a pronounced spike in insider trading at the outset of the investigation; that the increase in trading is attributable to corporate officers but not to independent directors; and that abnormal trading activity appears highly opportunistic and earns significant abnormal returns. Our results suggest that SEC investigations are often material non-public events, and that insiders trade based on private information about 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 (December 19, 2019). 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 )

4295 E Stevens Way NE
PACCAR Hall #468
Seattle, WA 98105
United States

Daniel Taylor

Wharton School, University of Pennsylvania ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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