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SEC's insider trading enforcements and target firms' stock values

Journal of Business Research
Publication Date
DOI: 10.1016/s0148-2963(96)00203-2


Abstract The effect of SEC's insider trading enforcements on target firms' stock values is examined. Two hypotheses are tested: (1) an announcement of SEC's insider trading enforcement has a negative effect on a target firm's stock value, and (2) an association exists between market reaction to an announcement of insider trading enforcement and these six factors: trading profit relative to firm size; firm size; whether a firm is facing ongoing investigation or judgment rendered; whether a firm or its employees are the enforcement targets; whether the enforcement is after the passage of the Insider Trading Sanctions Act of 1984 (ITSA) or the passage of the Insider Trading and Securities Fraud Enforcement Act of 1988 (ITSFEA); and whether the enforcement is announced in the financial press. Results of event-study methodology for testing the first hypothesis indicate a negative effect of SEC's enforcement action announcements on target firms' stock values. Results of cross-sectional regressions for testing the second hypothesis indicate greater negative market reaction to larger trading-profits enforcements, smaller target firms, and enforcements after enactment of ITSA and ITSFEA.

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