Many countries, including the U.S., impose closed periods (a.k.a. "blackouts") on corporate insider trading for a period of time preceding earnings announcements. Such regulations on insiders' trading activity are typically justified due to insiders' unique role and position in capital markets. Whether these regulations achieve their stated goals remains relatively understudied.
In July 2016, all E.U.-listed firms were required to impose a 30-day blackout period on corporate insider trading prior to interim or fiscal year-end earnings announcements. The variation across firms prior to the July 2016 rule created a quasi-natural experiment to assess the new (2016) rule's impact on "insider trading activity, profitability, and market consequences."
In The Impact of Mandatory Closed Periods on Corporate Insider Trading, Francois Brochet (BU—Accounting) et al. report results from a difference-in-differences strategy that compares 30 compare countries that adopted mandated closed periods after July 2016 (treatment group) with companies that already had such policies (control group) in place prior to 2016. Notably, what the authors report is that their results highlight that uniform closed periods "deter informed trading but may unintentionally harm market liquidity and information quality." The abstract follows.
"The Market Abuse Regulation (MAR), implemented in July 2016 across the EU, mandates uniform closed periods, prohibiting insider trading 30 days before earnings announcements. We find a significant reduction in insider trading during these periods in treated countries without prior mandates. Although some trades still occur, they do not appear to be driven by private information. However, treated insiders experience an increase in compensation. Furthermore, information asymmetry rises before earnings announcements, and treated firms experience a decline in institutional ownership. Overall, the study suggests that mandated closed periods do not lead to a wealth transfer from insiders to outsiders, nor do they enhance the information environment. These results underscore the limitations of regulatory one-size-fits-all measures in curbing corporate insider trading."
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