A rule to limit trading based on nonpublic stock information has limited effectiveness, according to a recent study by Texas McCombs Finance Professor Robert Parrino.
A rule to limit trading based on nonpublic stock information has limited effectiveness, according to a recent study by Texas McCombs Finance Professor Robert Parrino.
Issued in 2000 by the Securities & Exchange Commission, Rule 10b5–1 requires corporate insiders to schedule the purchase or sale of a predetermined number of shares through a third-party broker up to two years in advance. Because the trades under these “plan” sales are scheduled in advance of their execution, insiders are presumed less likely to be acting on inside information.
But how effectively do such plans curb insider trading? Parrino, with co-authors Eli Fich of Drexel University and Anh Tran of City University of London, investigate this by examining 13,930 stock sales by 1,629 CEOs at 1,322 firms from 2013 to 2020.
Researchers found that Rule 10b5–1 plans are widely used, accounting for 61% of all stock sales by CEOs in their sample. As might be expected, plan sales are more common at firms when there is greater risk of litigation, such as when a sale precedes an earnings announcement that might raise insider trading accusations.
