Determinants of Insider Trading Windows

Abstract

We use observed insider trades to assess the economic determinants of the enforcement of company-imposed insider trading restrictions. We find that the timing of quarterly allowed trading windows reflects concerns about information asymmetry, the strength of external monitoring, and executives’ liquidity needs. Enforced trading windows constrain optimistic insider trading activity, with insiders generating larger trading profits when boards set trading windows that are abnormally loose. We also identify and explore the enforcement of unscheduled, event-specific “ad hoc blackout windows” by firms engaged in material corporate events. Interestingly, the absence of insider trading in these windows is associated with contemporaneously higher information asymmetry. These periods are then followed by increased trading volume and higher stock returns, suggesting investors may not immediately incorporate all information conveyed by unscheduled trading restrictions.

Keywords: insider trading, blackout periods, corporate governance, information asymmetry, executive compensation

JEL Classification: G14, G34, M41