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SEC Rule 10b5-1 and Insiders' Strategic Trade

SEC Rule 10b5-1 and Insiders' Strategic Trade The U.S. Securities and Exchange Commission enacted Rule 10b5-1 to deter insiders from trading with private information, yet also protect insiders' preplanned, non-information-based trades from litigation. Despite its requirement that insiders plan trades when not privately informed, the rule appears to enable strategic trade. Participating insiders' sales systematically follow positive and precede negative firm performance, generating abnormal forward-looking returns larger than those earned by nonparticipating colleagues. The observed association does not appear to be explained by market transaction disclosure response, predictable reversion following positive performance, or general periodic price declines. There is evidence, however, that a substantive proportion of randomly drawn plan initiations are associated with pending adverse news disclosures. There is also evidence that early sales plan terminations are associated with pending positive performance shifts, reducing the likelihood that insiders' sales execute at low prices. Collectively, this suggests that, on average, trading within the rule does not solely reflect uninformed diversification. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Management Science INFORMS

SEC Rule 10b5-1 and Insiders' Strategic Trade

Management Science , Volume 55 (2): 16 – Feb 17, 2009
16 pages

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References (39)

Publisher
INFORMS
Copyright
Copyright © INFORMS
Subject
Research Article
ISSN
0025-1909
eISSN
1526-5501
DOI
10.1287/mnsc.1080.0928
Publisher site
See Article on Publisher Site

Abstract

The U.S. Securities and Exchange Commission enacted Rule 10b5-1 to deter insiders from trading with private information, yet also protect insiders' preplanned, non-information-based trades from litigation. Despite its requirement that insiders plan trades when not privately informed, the rule appears to enable strategic trade. Participating insiders' sales systematically follow positive and precede negative firm performance, generating abnormal forward-looking returns larger than those earned by nonparticipating colleagues. The observed association does not appear to be explained by market transaction disclosure response, predictable reversion following positive performance, or general periodic price declines. There is evidence, however, that a substantive proportion of randomly drawn plan initiations are associated with pending adverse news disclosures. There is also evidence that early sales plan terminations are associated with pending positive performance shifts, reducing the likelihood that insiders' sales execute at low prices. Collectively, this suggests that, on average, trading within the rule does not solely reflect uninformed diversification.

Journal

Management ScienceINFORMS

Published: Feb 17, 2009

Keywords: Keywords : insider trading ; Securities Exchange Act of 1934 ; diversification trade ; planned trade

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