Abstract
Trading on non-public material information is fertile ground for a discussion of ethical behavior. The long-running legal tug-of-war over what constitutes illegal insider trading delivers challenges to regulatory authorities charged with detecting and enforcing the law, and is likely one of the reasons that prosecution of insider trading events remains rather uncommon. One can observe both increased volume in the equity and option markets and run-ups in the stock price prior to the announcement of the acquisitions; however, the detection of illegal or unethical insider trading can be difficult. Given the legal uncertainty around insider trading and the circumstantial evidence from the trading activity, it is almost impossible to identify unethical insider trades unless there is a whistleblower or trades are large in size and impeccable in timing. Using call option trading around two merger announcements with similar firms that resulted in different ultimate treatment from the SEC, we illustrate the struggle regulators and prosecutors have with identifying and enforcing unethical insider trades.
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Notes
See Del Guercio et al. (2015) for a discussion and supporting empirical evidence of the increased enforcement intensity from the SEC during this period.
The Cumulative Abnormal Returns were computed using a standard market model with a benchmark period of daily returns from 90 days before the announcement to 30 days before the announcement.
Statement by Robert Khuzami, Director, Division of Enforcement U.S. Securities and Exchange Commission, Before the United States Senate Committee on Homeland Security and Governmental Affairs (https://www.sec.gov/news/testimony/2011/ts120111rsk.htm).
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Acknowledgements
The authors would like to thank Amy Dundon and Jim Berchtold for funding this project through the Dundon-Berchtold Institute. We would also like to thank Father Mark Poorman, president of the University of Portland, for choosing us as part of the initial group in the ethics program, and Dean Michael Andrews, McNerney-Hanson Endowed Chair in Ethics, for his guidance in the early formation of this paper. Finally, we would like to thank the editors and reviewers for their comments with helping us develop this paper.
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Adams, B.J., Perry, T. & Mahoney, C. The Challenges of Detection and Enforcement of Insider Trading. J Bus Ethics 153, 375–388 (2018). https://doi.org/10.1007/s10551-016-3403-4
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DOI: https://doi.org/10.1007/s10551-016-3403-4