An Empirical Study of Abnormal Stock Returns of Illegal Insider Trading: SEC Enforcement Actions for the Years 2000 to 2009

This dissertation investigates the abnormal returns of illegal insider trading transactions filed by the SEC insider trading enforcement actions for the years 2000 to 2009. Using a modified market model in conjunction with event study methodology, six hypotheses based on new and current theories are tested. Sample stocks are divided into positive news stocks and negative news stocks in order to examine their abnormal returns separately. This study supports results of previous studies that show takeover announcements generate high abnormal returns, small firms have high information asymmetry, there is large abnormal returns on positive news, and large loss avoidance on negative news. Insider trading generates higher abnormal returns for high-tech firms than for non-high tech firms when using a Fama-French SIC code one classification scheme. Abnormal returns due to insider trading generally decreased after the passage of the Sarbanes-Oxley (SOX) regulation. Illegal insider trading motivated by news on Private Investment in Public Equity (PIPEs), a specific strategy of hedge funds and considered a negative news event, show positive abnormal returns under some event windows. Overall, findings suggest that stocks with known existing insider traders are less efficient in absorbing negative news than positive news, implying that insider trading contributes to market inefficiency thus refuting the strong-form market efficiency theory. Anomalies in the sample data support the lack of SEC enforcement for hedge funds’ illegal insider trading