The rule 10b5-1 loophole: an empirical study

The rule 10b5-1 loophole: an empirical study This paper seeks to empirically examine the market effects of a loophole in insider trading law that allows insiders to cancel supposedly irrevocable pre-planned trades under SEC Rule 10b5-1 based on inside information. Based on an econometric analysis of a dataset of 81 NASDAQ-listed companies from 2004 to 2006, the paper concludes that: (1) the trading public attaches primary significance to the announcement of a 10b5-1 plan rather than the specified start date of that plan; (2) insiders make above-market profits using 10b5-1 plans but do not appear to arbitrarily or continually create such plans; (3) 10b5-1 plans have a significant negative effect on the liquidity of a firm’s shares, and therefore the firm’s cost of capital; and (4) insiders do not appear to increase the volatility of their own firms’ shares in order to profit by trading on the basis of material nonpublic information under the protection of the 10b5-1 safe harbor. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

The rule 10b5-1 loophole: an empirical study

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Publisher
Springer Journals
Copyright
Copyright © 2010 by Springer Science+Business Media, LLC
Subject
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1007/s11156-009-0163-6
Publisher site
See Article on Publisher Site

Abstract

This paper seeks to empirically examine the market effects of a loophole in insider trading law that allows insiders to cancel supposedly irrevocable pre-planned trades under SEC Rule 10b5-1 based on inside information. Based on an econometric analysis of a dataset of 81 NASDAQ-listed companies from 2004 to 2006, the paper concludes that: (1) the trading public attaches primary significance to the announcement of a 10b5-1 plan rather than the specified start date of that plan; (2) insiders make above-market profits using 10b5-1 plans but do not appear to arbitrarily or continually create such plans; (3) 10b5-1 plans have a significant negative effect on the liquidity of a firm’s shares, and therefore the firm’s cost of capital; and (4) insiders do not appear to increase the volatility of their own firms’ shares in order to profit by trading on the basis of material nonpublic information under the protection of the 10b5-1 safe harbor.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Jan 21, 2010

References

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