Asymmetric information and Insider Trading decisions: An analysis of transactions, reporting, and enforcement

I document that a significant number of insiders violate SEC reporting requirements by filing transactions after the legally required deadline. Although these violations are straightforward for the SEC to detect, instances of reporting violations persist. Prior to Sarbanes-Oxley, 29% of open market transactions fell outside the required reporting window. Following the enactment of SOX, 8% of all transactions continue to violate the filing deadline. During the filing delay trades are unknown to outside market participants and earn significant abnormal returns. I show that almost a quarter of filing violations are made by insiders that egregiously violate the reporting requirement. This subgroup realizes significantly greater abnormal returns for purchases and sales leading up to the reporting date. Most filing violations take place during periods of high information asymmetry, and insiders privately earn significant abnormal returns. Collectively, these findings indicate that a subgroup of insiders extract information rent from private knowledge during windows of unreported trading. The SEC reacts to numerous insiders disregard this reporting requirement by charging a small percentage of the total violators for wrongdoing. I employ a unique data set of SEC cases brought against top managers who fail to meet the filing requirements. By comparing the trades in indictments to similar non-indicted transactions, I assess that the SEC pursues insiders that violate the reporting requirement egregiously and are a manager at larger firms. While the coverage of these actions is thin, it significantly deters insiders from filing late after the enforcement. In addition, firm insiders may trade on private information concerning forthcoming innovations. Before high-quality innovations become public knowledge, I find that insiders significantly increase their holdings in the firm. After a patent for a breakthrough innovation is granted, the firm realizes significant abnormal returns. By insider, I find that members of the Corporate Suite increase their holdings around the application date and are the only insiders that earn significant abnormal returns following the grant date. These results suggest that key insiders can identify breakthrough patents ex-ante and utilize this information advantage before the innovation becomes public knowledge. These innovations translate into an increase in firm value