A legal loophole lets executives trade on insider information, and it seems to be rampant
flickr/75144752@N00
The academics studied buying and selling of company stock by executives in periods it called the "8-K trading gap." Liz Hoffman at The Wall Street Journal covered the same research here.
When an event occurs at a public company, companies are required to disclose the information through a Form 8-K filing with the Securities and Exchange Commission within four days of the event.
The study said: "These rules thus create a period during which market-moving information is known by those inside the firm but not most public-company investors - a period we call the '8-K trading gap.'"
The study examined more than 15,000 instances where insiders traded within the 8-K trading gap. It turns out that these trades were consistently profitable, that the executives typically buy ahead of the stock price rising as a result of the 8-K, and that the little likelihood of this being a product of random chance is minimal.
Here is the critical passage from the research summary:
"We identify systematic abnormal returns of 42 basis points on average, per trade, from trades by insiders during the 8-K gap. When insiders engage in an unusual transaction during the gap - open-market purchases of their own company's stock - they earn even larger abnormal returns of 163 basis points. We also show that, when they engage in such purchases, insiders are correct about the directional impact of the 8-K filing more often than not - and that the probability that this finding is the product of random chance is virtually zero.
Read the full Wall Street Journal here.
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