The Deterrent Effect of Insider Trading Enforcement Actions

46 Pages Posted: 18 May 2021 Last revised: 19 May 2021

See all articles by Robert H. Davidson

Robert H. Davidson

Virginia Polytechnic Institute & State University - Department of Accounting and Information Systems

Christo A. Pirinsky

University of Central Florida

Date Written: May 17, 2021

Abstract

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

Davidson, Robert H. and Pirinsky, Christo Angelov, The Deterrent Effect of Insider Trading Enforcement Actions (May 17, 2021). Available at SSRN: https://ssrn.com/abstract=3848126 or http://dx.doi.org/10.2139/ssrn.3848126

Robert H. Davidson

Virginia Polytechnic Institute & State University - Department of Accounting and Information Systems ( email )

Pamplin College of Business
Blacksburg, VA 24061
United States

Christo Angelov Pirinsky (Contact Author)

University of Central Florida ( email )

College of Business Administration/Finance
PO Box 161400
Orlando, FL FL 32816
United States
407-823-5962 (Phone)

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