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The effect of voluntary versus mandatory adoption of trading policies on the returns to insider trades

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  • Chang, Millicent
  • Wee, Marvin

Abstract

An insider trading policy is a critical aspect of a firm's internal governance which ensures the maintenance of corporate transparency. We examine the effect of trading policies on the returns to trades by corporate insiders over two periods: one where the adoption of a policy is voluntary and another where it is mandatory. In the former, we find that the requirement to notify the firm prior to trading does not result in lower trade returns on days outside the permitted trading windows. Where adoption of a policy is mandatory, trade returns made during the restricted windows are higher and the requirement to notify prior to trading significantly reduces these returns. The mandatory disclosure of a trading policy is effective in reducing returns from insider trading, suggesting improved investor confidence through greater transparency.

Suggested Citation

  • Chang, Millicent & Wee, Marvin, 2016. "The effect of voluntary versus mandatory adoption of trading policies on the returns to insider trades," Pacific-Basin Finance Journal, Elsevier, vol. 38(C), pages 76-87.
    • Handle: RePEc:eee:pacfin:v:38:y:2016:i:c:p:76-87
    DOI: 10.1016/j.pacfin.2016.03.007
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    Cited by:

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    2. Robert W. Faff, 2019. "Adopting a Structured Abstract Design to More Effectively Catch Reader Attention: An Application of the Pitching Research® Framework," Capital Markets Review, Malaysian Finance Association, vol. 27(2), pages 1-13.
    3. Natalya Zelenyuk & Robert Faff & Shams Pathan, 2020. "Size‐conditioned mandatory capital adequacy disclosure and bank intermediation," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(4), pages 4387-4417, December.
    4. Katselas, Dean, 2018. "Insider trading in Australia: Contrarianism and future performance," Pacific-Basin Finance Journal, Elsevier, vol. 48(C), pages 112-128.
    5. Wei‐Huei Hsu & Sian Owen & Jo‐Ann Suchard, 2020. "The value of ongoing venture capital investment to newly listed firms," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(2), pages 1327-1349, June.
    6. Dean Katselas, 2020. "Strategic insider trading around earnings announcements in Australia," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(4), pages 3709-3741, December.

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