Corporate Policies Restricting Trading by Insiders

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