Insider Trading and Securities Fraud Enforcement Act (Itsfea)
Posted: 10 Oct 1998
This paper finds new evidence that the threat of legal sanctions significantly affects the trading behavior of insiders. Specifically, I examine the effects of the Insider Trading and Securities Fraud Enforcement Act (ITSFEA) on insider trading around earnings announcements. Given ITSFEA's stated concern with trading on private information prior to its release, I argue that insiders may respond to the Act by shifting their trading to the post-announcement period. The evidence presented below is consistent with the argument that insiders responded to Congress' clear disdain for trading on private information prior to its release. Following the Act, insiders focus more of their trading after an earnings announcement than before one. Moreover, insiders trade less frequently and earn smaller profits on their trades around earnings announcements after the Act. Finally, the observed shift in trade timing after the Act is accompanied by a change in insider trading strategies. Specifically, insiders' pre-announcement trading was uncorrelated with earnings surprise prior to the Act, while subsequent to the Act, pre-announcement insider trading was decreasing in earnings surprise.
JEL Classification: K42
Suggested Citation: Suggested Citation