Have regulatory changes, such as the reduction in lag time for reporting insider trades specified by the 2002 Sarbanes-Oxley Act (SOX) from up to 40 calendar days to two business days, improved the informativeness of insider trading data? In his December 2010 paper entitled “Has the Informativeness of Insider Filing Changed Post Sox? Has the Latest Credit Crunch Improved this Informativeness?”, Ashrafee Hossain compares the information content of SEC Form 4 filings before and after SOX, Regulation FD (October 2000) and the recent credit crisis. He also investigates variation of informativeness with firm size, insider trade size and rank of the trading executive. He focuses on cumulative abnormal (relative to market) return for a two-day trading interval starting with the filing date. Using pre-SOX Form 4 trading and stock price data from January 1, 1996 through August 29, 2002 (1,191 filings) and post-SOX data from the start of mandatory electronic filing on June 30, 2003 through May 31, 2009 (41,603 filings), he finds that:
- Informativeness of insider trades appears to increase post-SOX. For purchases (sales), the average two-day cumulative abnormal return post-SOX is 1.13% (-0.54%), compared to 0.32% (-0.19%) pre-SOX.
- The effect of Regulation FD on informativeness of insider trades is smaller (not statistically significant). For purchases (sales), the average two-day cumulative abnormal return post-Regulation FD is 0.52% (-0.36%), compared to 0.26% (-0.12%) pre-Regulation FD.
- Informativeness of insider trades appears to increase post-credit crisis. For purchases (sales), the average two-day cumulative abnormal return post-credit crunch is 1.84% (-0.97%), compared to 0.93% (-0.39%) pre-credit crunch.
- Insider ranking is the most influential variable explaining the informativeness of filings, both pre-SOX and post- SOX. The higher the rank of the insider, the greater the abnormal return around the filing date.
- Though there is a positive (negative) relationship between purchase (sale) trade size relative to market capitalization and two-day abnormal return, results are not statistically significant.
- Though the informativeness of insider trading data is somewhat more pronounced for small firms, the effect of size is not statistically significant.
In summary, evidence indicates that implementation of the Sarbanes-Oxley Act and the credit crisis have both enhanced the informativeness of insider trading data as reported via SEC Form 4.
Note that:
- Returns are gross, not net.
- The different filing schedules/methods pre-SOX and post-SOX (monthly cumulative versus incremental, and paper versus electronic) complicate comparison.
- Since the start of the return measurement interval is the Form 4 filing date, part of the two-day abnormal return may not be realistically exploitable.
- The effect of the credit crisis on the informativeness of insider trading data may be transitory.
- This study tests only short-term informativeness of insider trading. Regulatory changes have not been in effect long enough to reasonably investigate longer-term aggregate effects.
