The Deterrent Effect of Insider Trading Enforcement Actions
46 Pages Posted: 18 May 2021 Last revised: 19 May 2021
Date Written: May 17, 2021
We analyze whether exposure to an SEC insider trading enforcement action affects how insiders trade. We find that following an insider trading enforcement action at one firm, exposed insiders earn significantly lower abnormal profits from their trades at other firms compared to non-exposed insiders. The deterrent effect is stronger when a fellow insider is convicted and is similarly significant both pre- and post-SOX. Following the enforcement event, exposed insiders do not trade less frequently, but do trade significantly fewer shares per trade. Insiders who have witnessed an enforcement action have a lower probability for future conviction than their unexposed peers.
Keywords: insider trading, inside information, deterrence, enforcement, salience
JEL Classification: G14, G40, K42
Suggested Citation: Suggested Citation