Determinants of Insider Trading Windows

Abstract

Most publicly-traded firms adopt insider trading policies that establish pre-specified quarterly windows when insiders are allowed to trade. However, relatively little is known about how boards determine the length and timing of these windows, in part, because disclosure is voluntary and sparse. We use observed insider trading data to estimate the start and end points of quarterly trading windows, and the corresponding “blackout” periods when trading is restricted. We find that restrictions on trading reflect a heightened concern about expected information asymmetry, both with respect to how long insiders must wait after an earnings announcement before trading can begin, and how quickly the trading window closes as information builds up over the quarter. In addition, we find that trading is more restrictive when the firm has stronger external monitoring, and is more relaxed when insiders have greater liquidity needs. We also present evidence on event-specific “ad hoc blackout windows,” where insiders appear to be largely prohibited from trading during a given quarter. These ad hoc blackout periods tend to be followed by disclosure of future material corporate events, such as M&A activity or changes in the board or top management, are associated with contemporaneously higher information asymmetry, and are followed by increased trading volume and higher stock returns, suggesting that investors may not immediately incorporate the information conveyed by these unscheduled restrictions.