Patterns of Insider Trading

Abstract

Both regulatory restrictions and voluntary corporate restrictions on insider trading around earnings announcements are based on a presumption of low information asymmetry periods (“white windows”) as contrasted with high information asymmetry periods (“black windows”). We first, document that a large proportion of trading in the US takes place in the black window where trading is explicitly banned in the UK and implicitly banned by corporate policies. Second, we show that trading in the white period exhibits a strong self-selection bias where trade takes place only in white window periods of high return. We also show that the excess returns earned by “black” period trades vanish if postponed to the next white period following the earnings announcement. Lastly, we show that a large proportion of pre-specified trading under SEC sponsored 10b5-1 plans are filed for black window periods and that these plans generate higher abnormal returns than white window 10b5-1 plans.