The Effect of Regulation on the Volume, Timing, and Profitability of Insider Trading

In this paper, we investigate the timing, volume, and profitability of insider trading has changed over time corresponding to changes in the regulatory environment over the period 1986-2008. Consistent with increased regulatory scrutiny, we find that there has been a steady increase over time in the proportion of trades by insiders that occur right after quarterly earnings announcements, and that more and more firms appear to adopt policies to restrict their insider trading. Along with these changes in the timing of insider transactions, we provide evidence that the overall informativeness of insider trading has also decreased over time, and that the profitability of insider trading completely disappears in the post-2002 period following the implementation of SOX. Examining firms with restrictions on insider trading, we find that insiders in these firms continue to take advantage of positive information but are more careful in exploiting negative information. The results suggest that insiders react strategically to changes in the regulatory environment.