Disclosing and Cooling-Off: An Analysis of Insider Trading Rules

Abstract

We analyze two insider-trading regulations recently introduced by the U.S. Securities and Exchange Commission: advance disclosure and ''cooling-off period.'' The former requires an insider to disclose trading plans at adoption, while the latter mandates a delay period before execution. Disclosure increases price efficiency but has mixed welfare implications. If the insider has large liquidity needs, in contrast to the conventional wisdom from ''sunshine trading,'' disclosure can even reduce the welfare of all investors. A longer cooling-off period increases outside investors' welfare but decreases price efficiency. Its implication for the insider's welfare depends on whether the disclosure policy is already in place.

Keywords: Insider trading, Rule 10b5-1, Sunshine trading, Disclosure, Cooling-off period.

JEL Classification: G10