THE EFFECTS OF THE INSIDER TRADING SANCTIONS ACT OF 1984: THE CASE OF SEASONED EQUITY OFFERINGS

Previous empirical research indicates that corporate insiders tend to increase (decrease) their shareholdings before events that increase (decrease) firm value. More recent evidence suggests, however, that passage of the Insider Trading Sanctions Act of 1984 (ITSA) may have deterred this behavior. Our results indicate that before passage of the ITSA, insiders exploited their access to nonpublic information by selling shares before the announcement of equity issues. However, after passage of the ITSA insiders no longer displayed this behavior. We conclude the ITSA has a deterrent effect, which is more heavily concentrated on insiders at the highest level of the firm who are most visible to regulators and other market participants.     

FURTHER EVIDENCE ON INSIDER TRADING AND THE MERITS OF SECURITIES CLASS ACTIONS

To provide further evidence on the merits of securities class actions, we examine insider transactions immediately before and during the class period, using a larger and newer data set. We show that insiders reduce their stock sales by an abnormal amount immediately before the class period. Alternative measures of insider transactions and analysis of data before the enactment of the Private Securities Litigation Reform Act of 1995 provide consistent results. These new findings indicate that class actions, on average, have merit. Our data also reestablish a previous empirical result that there is no abnormal selling during the class period.     

PERFORMANCE OF STOCKS RECOMMENDED ON THE BASIS OF INSIDER TRADING ACTIVITY

The purpose of this paper is to assess whether abnormal returns could have been earned by an investor who concentrated solely on the stocks listed in the Consensus of Information (COI) monthly newsletters. Using residual-based techniques, the authors find that (1) stocks listed in the COI newsletters were characterized by excess positive returns over the four months immediately preceding listing and that (2) users of the COI's recommendations could have earned moderate excess returns by systematically acquiring shares of these companies and holding them over a twelve-month period starting in the month the newsletter is published or one month hence. Given that the recommendations yielding the largest abnormal returns to noninsiders were based on a mixture of open market purchases and exercised stock options, definitive conclusions with respect to the predictive implications of exercised stock options cannot be drawn.     

THE EFFECTS OF INSIDER TRADING RESTRICTIONS: EVIDENCE FROM HISTORICAL DIVIDEND INITIATIONS AND OMISSIONS

We investigate whether insider trading restrictions had their intended effects during the 1960s and 1970s. We examine insider trading and stock market behavior before dividend initiations and omissions announced between 1935 and 1974. Contrary to existing research and commentary, we show that restrictions had meaningful effects. During the 1960s and 1970s, insiders sold less frequently before dividend omissions, and the average profitability of insider trades declined. In addition, the positive (negative) stock price runup before dividend initiations (omissions) decreased after 1961. The results provide some vindication for the Securities and Exchange Commission's adjudicative approach toward insider trading regulation.     

ILLEGAL INSIDER TRADING: IS IT RAMPANT BEFORE CORPORATE TAKEOVERS?

This paper investigates the role of insider trading as an explanation for the observed pre-announcement price run-ups for takeover targets. We hypothesize that if insider trading is a significant contributor to such price run-ups, then observed run-ups should be smaller for takeovers occurring after May 1986 (the beginning of the “insider trading scandal”) relative to those occurring prior to May 1986. The evidence suggests that insider trading is not, on average, a significant contributor to pre-announcement price run-ups.     

MANAGERIAL OWNERSHIP CHANGE AND FIRM VALUE: EVIDENCE FROM DUAL-CLASS RECAPITALIZATIONS AND INSIDER TRADING

We explore the relation between managerial ownership and firm value by examining a sample of firms that announce dual-class recapitalizations and the insider trading activity that precedes these announcements. Insider trading activity, unlike recapitalization, requires managers to commit their personal wealth and therefore serves as an indicator of the motivation behind the recapitalization. The recapitalization, in effect, allows managers to magnify the increase in vote ownership that results from insider buying and offsets the decrease in vote ownership that results from insider selling. This study adds to our understanding of dual-class recapitalizations by linking the wealth effects and changes in ownership concentration with ***manager-shareholder agency issues that follow from recapitalization and insider trading activity. Results show a positive relation between the change in firm value and ownership for recapitalizations before the 1984 New York Stock Exchange moratorium on delisting dual-class firms when ownership was high and control was firmly established. Results show a negative relation for recapitalizations since 1984 when ownership levels were lower and voting control was not assured. These results support the notion that more recent recapitalizations entrench managers.     

INSIDER TRADING EFFECTS ON STOCK RETURNS AROUND OPEN-MARKET STOCK REPURCHASE ANNOUNCEMENTS: AN EMPIRICAL STUDY

In this paper we empirically examine the effects of insider trading activities, the percentage of common shares outstanding authorized for repurchase, and management ownership on stock returns around open-market stock repurchase announcements. The study is conducted on a sample of 204 firms that announced open-market stock repurchases between 1982 and 1990. Results show that insider trading activities during the month that immediately precedes the announcement have a significant effect. While stockholders of firms with insider net selling activities earn positive excess returns, those of firms with insider net buying activities earn larger and more significant excess returns. Insider trading activities during more distant periods do not show any effects on stock returns. Results also indicate that management ownership has a significant positive effect on stock returns, and this effect is more positive when the percentage of common shares outstanding authorized for repurchase is large.     

INSTITUTIONAL TRADING AND SECURITY PRICES: THE CASE OF CHANGES IN THE COMPOSITION OF THE S&P 500 INDEX

This paper examines the common stock valuation and liquidity effects of firms being added to and deleted from the S&P 500 Index. Three potential pricing and trading volume hypotheses are discussed and tested—an Information Content Hypothesis (ICH), a Price Pressure Hypothesis (PPH), and a Liquidity Cost Hypothesis (LCH). The empirical findings indicate that firms being added to (deleted from) the S&P 500 Index over the 1977 to 1983 period experience positive (negative) abnormal common stock returns on the day following the addition. An analysis of common stock liquidity around additions to the Index reveals that while relative trading activity increases in the month of addition, it actually declines in subsequent months. The valuation and liquidity results are consistent to some degree with both the PPH and the LCH and are most likely due to index fund managers adjusting their holdings to reflect changes in the Index.     

THE IMPACT OF THE INSIDER TRADING SCANDAL ON THE INFORMATION CONTENT OF THE WALL STREET JOURNAL'S “HEARD ON THE STREET” COLUMN

We examine the impact of a scandal on the information content in the “Heard on the Street” column of the Wall Street Journal. Following the scandal in 1984, the column is found to have a reduced impact on stock prices for both buy and sell recommendations. However, the stock price response to information later published in the column before the publication day is smaller for the post-scandal period. This result suggests that after the scandal, editors and authors may have become more cautious in guarding against information leaks in the column. The scandal does not appear to have changed the impact of the column on trading volume.