Corporate Policies Restricting Trading by Insiders

Posted: 17 Apr 1998

See all articles by J. Carr Bettis

J. Carr Bettis

Arizona State University (ASU) - Finance Department; Fathom Lab; Verus Analytics, Inc

Michael L. Lemmon

University of Utah - Department of Finance

Jeffrey L. Coles

University of Utah - Department of Finance; Arizona State University (ASU) - Finance Department

Date Written: March 27, 1998

Abstract

This paper provides the first systematic examination of policies and procedures put in place by corporations to regulate trading in the stock by the firm's own insiders. Over 90 percent of our sample companies have their own policy restricting trading by insiders, and nearly 80 percent have explicit blackout periods during which the company prohibits trading by its insiders. We provide detailed information on: the form of such policies; the incidence of the various types of rules and restrictions; and the monitoring and assistance activities associated with implementation of the policy. In addition, we examine the characteristics of firms that choose to self-regulate, and find that both stock return volatility and insider trading frequency are positively-related to the use of blackout periods. Our data indicate that blackout periods successfully suppress trading by insiders (both purchases and sales) and that the blackout period is associated with a slightly narrower bid-ask spread. Consistent with this small effect on the spread, we find that the profitability of trades made during allowed trading windows is only slightly higher than profitability based on trades made in prohibited blackout periods. Finally, our findings on trading around earnings announcements suggest that experiments designed to address the issues of the effectiveness of insider trading regulations and the efficiency of capital markets are likely to be more powerful if they account for the presence and effects of corporate restrictions on trading.

JEL Classification: G30, G38, K22

Suggested Citation

Bettis, J. Carr and Lemmon, Michael L. and Coles, Jeffrey L., Corporate Policies Restricting Trading by Insiders (March 27, 1998). Available at SSRN: https://ssrn.com/abstract=76649

J. Carr Bettis

Arizona State University (ASU) - Finance Department ( email )

W. P. Carey School of Business
PO Box 873906
Tempe, AZ 85287-3906
United States

Fathom Lab ( email )

16211 N. Scottsdale Rd
#A6A-628
Scottsdale, AZ 85254
United States

Verus Analytics, Inc ( email )

15210 N Scottsdale Rd
Suite 250
Scottsdale, AZ 85254
United States

Michael L. Lemmon (Contact Author)

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States
801-585-5210 (Phone)
801-581-7214 (Fax)

Jeffrey L. Coles

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States
801-587-9093 (Phone)

Arizona State University (ASU) - Finance Department ( email )

W. P. Carey School of Business
P.O. Box 873906
Tempe, AZ 85287-3906
United States
480-965-4475 (Phone)
480-965-8539 (Fax)

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