The Deterrence Effects of SEC Enforcement Actions on Insider Trading

• In Event: Monitoring Effects: Standard Setters, Regulators and Activists

Abstract

We examine whether enforcement actions of the U.S. Securities and Exchange Commission (SEC) deter illegal insider trading activity. We study the deterrence effects of enforcement actions on the insider trading activity of corporate insiders both at the firm targeted by the SEC and non-targeted firms. For non-targeted firms, we select insiders at 1) firms in the same industry with target firms, 2) firms geographically close to target firms, 3) general non-targeted firms. Using a hand-collected sample of publicly disclosed SEC enforcement actions targeting illegal insider trading, we find that corporate insiders at target firms and corporate insider at firms in the same industry execute less profitable purchases following the disclosure of the enforcement action. We also provide evidence that the deterrence effects are more pronounced when there are fewer firms in the target firms’ industry and when target firms are more visible. We find limited evidence that insider sales become less profitable after SEC enforcement actions. Finally, non-targeted insiders at firms that are in the same industry and geographically closer to the targeted insiders execute less profitable insider purchase trades after observing SEC charges. However, non-targeted insiders at geographically close firms that are not in the same industry do not execute less profitable purchase trades after observing SEC charges. These results provide evidence on the effectiveness of SEC enforcement actions on deterring questionable insider trading activities.

Authors

• Seong Jin Ahn, Washington University

• Jared Jennings, Washington University