DO CEOS WITH SHARE PLEDGE SUPPRESS THE FIRMS’ INNOVATION?

It is a common phenomenon for corporate insiders to pledge their stock as collateral for personal loans in China. Using Chinese data, this paper examines the effects of CEOs’ share pledge on the firms’ future innovation output. Evidence suggests that the existence of CEOs with share pledge has a significantly negative effect on firms’ innovation output. The baseline results are consistent with a variety of robust tests. Furthermore, we propose the effect of CEOs’ share pledge works on the corporate innovation through the market value management channel. Finally, we find that the good corporate governance is a possible channel to relieve the agency cost on CEOs.

Insider Trading

This chapter addresses regulation of insider trading in the United States. Uncertainties and inconsistencies prevail in this setting resulting in disparate treatment for similarly situated actors. Other developed countries, while applying many principles of U.S. securities law to their securities markets, have rejected the U.S. approach in the insider trading context. To redress this situation, Congress should enact comprehensive legislation that meaningfully addresses the contours of the insider trading prohibition. Among other mandates, this legislation would: require corporate insiders to provide advance notice of their contemplated transactions in the subject company’s equity securities; bar corporate insiders and other access persons from trading in the subject company’s securities during the interval between the occurrence of a reportable event and the making of a SEC filing (such as a Form 8-K); close loopholes that currently exist with respect to the propriety of insider trading plans; and adopt a comprehensive access approach governing the legality of trading and tipping on the basis of material nonpublic information.

The Securities and Exchange Commission

This chapter focuses on the Securities and Exchange Commission’s numerous failures to engage in meaningful regulation and enforcement and recommends a fundamental solution that should substantially ameliorate the current unpalatable situation. As compared to yesteryear, the SEC no longer is viewed as a champion of investor protection. In its analysis, the chapter provides many examples, including: the Commission’s failure to adopt a current reporting system mandating disclosure (absent the existence of meritorious business justification) of all material information; its regulatory activism to insulate from private liability exposure certain misconduct engaged in by companies and their insiders; its levying of large money penalties against major enterprises without pursuing their officers and directors; and its refusal to implement statutory directives, including its failure to use the control person provision against corporate insiders. The solution to this unacceptable situation is to reconstitute the composition of SEC Commissioners. As elaborated upon in the chapter, this objective would be achieved by increasing the size of the Commission and requiring that the composition of the SEC Commissioners (including the SEC Chair) would be far more diverse than is current practice.

Aggregate congressional trading and stock market returns

Purpose What information do members of Congress (politicians) use when they trade stocks? The purpose of this paper is to attempt to answer this question by investigating the relationship between an aggregate measure of trading by members of Congress (aggregate congressional trading) and future stock market returns. Design/methodology/approach The authors follow the empirical framework used in academic work on corporate insiders. In particular, they aggregate 61,998 common stock transactions by politicians over the 2004–2010 period and estimate time series regressions at a monthly frequency with heteroskedasticity and autocorrelation robust t-statistics. Findings The authors find that aggregate congressional trading predicts future stock market returns, suggesting that politicians use economy-wide (i.e. macroeconomic) information in their stock trades. The authors also present evidence that aggregate congressional trading is related to the growth rate of industrial production, suggesting that industrial production serves as a potential channel through which aggregate congressional trading predicts future stock market returns. Originality/value To the best of the authors’ knowledge, this study is the first to document a relationship between aggregate congressional trading and stock market returns. The media and scholarly attention on politicians’ trades have mostly focused on the question of whether politicians have superior information on individual firms. The results from this study suggest that politicians’ informational advantage may go beyond individual firms such that they potentially have superior information on the overall trajectory of the economy as well.

Asymmetric Timing of Gain and Loss Recognition and Insider Trading Profitability

We provide evidence that the profitability of corporate insiders’ trading decreases in the degree of asymmetric timely loss recognition (TLR) of their firms’ financial reporting. Consistent with TLR reducing insiders’ information advantage over outside shareholders regarding future negative news about the firm, we find that reduced insider trading profitability is mainly driven by (a) stock sales, as opposed to purchases; (b) the price change component of trading, as opposed to its volume; and (c) insiders’ nonroutine trades, as opposed to less information driven routine trades. Although CEOs/CFOs are more likely to influence TLR, the effect is more pronounced for non-CEO and non-CFO insiders, inconsistent with reverse causality. Overall, our findings suggest that TLR reduces managers’ ability to extract rents from investors via insider trading.

Undisclosed SEC Investigations

One of the hallmarks of the Security and Exchange Commision's (SEC's) investigative process is that it is shrouded in secrecy––only the SEC staff, high-level managers of the company being investigated, and outside counsel are typically aware of active investigations. We obtain novel data on all investigations closed by the SEC between 2000 and 2017––data that were heretofore nonpublic––and find that such investigations predict economically material declines in future firm performance. Despite evidence that the vast majority of these investigations are economically material, firms are not required to disclose them, and only 19% of investigations are initially disclosed. We examine whether corporate insiders exploit the undisclosed nature of these investigations for personal gain. Despite the undisclosed and economically material nature of these investigations, we find that insiders are not abstaining from trading. In particular, we find a pronounced spike in insider selling among undisclosed investigations with the most severe negative outcomes; and that abnormal selling activity appears highly opportunistic and earns significant abnormal returns. Our results suggest that SEC investigations are often undisclosed, economically material nonpublic events, and that insiders are trading in conjunction with these events. This paper was accepted by Suraj Srinivasan, accounting.

Shadow Trading

We investigate whether corporate insiders attempt to circumvent insider trading restrictions by using their private information to facilitate trading in economically-linked firms, a phenomenon we call "shadow trading." Using measures of informed trading to proxy for shadow trading, we find increased levels of informed trading among business partners and competitors before a firm releases private information. To rule out alternative explanations, we examine two shocks to insiders' incentives to engage in shadow trading: high-profile regulatory enforcement against conventional insider trading and staggered changes to their outside employment opportunities. Finally, we document attenuated levels of informed trading among business partners and competitors when firms prohibit shadow trading. Overall, we provide evidence that shadow trading is an undocumented and widespread mechanism that insiders use to avoid regulatory scrutiny.