The Deterrent Effect of Insider Trading Enforcement Actions

Robert H Davidson
Pamplin School of Business, Virginia Polytechnic Institute and State University

Christo Pirinsky
University of Central Florida

Abstract

We analyze whether exposure to an SEC insider trading enforcement action affects how insiders
trade. We find that following an insider trading enforcement action at one firm, exposed insiders
earn significantly lower abnormal profits from their trades at other firms compared to non-exposed
insiders. The deterrent effect is stronger when a fellow insider is convicted and is
similarly significant both pre- and post-SOX. Following the enforcement event, exposed insiders do
not trade less frequently, but do trade significantly fewer shares per trade. Insiders who have
witnessed an enforcement action have a lower probability for future conviction than their unexposed
peers.

Keywords: insider trading, inside information, deterrence, enforcement, salience

JEL Classification: G14, G40, K42.

Post print manuscript

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