Deterrence or Displacement? Evidence from Insider Trading Activity after SEC Enforcement Actions
We examine whether SEC enforcement actions deter opportunistic insider trading among nontargeted insiders employed by industry peers. Prior research suggests that SEC enforcement actions deter opportunistic trading overall and among non-targeted insiders employed by the same firm as the targeted insider. We find that SEC enforcement actions do not uniformly deter opportunistic trading. Specifically, we find that non-targeted insiders employed by industry peers increase trading during more opportunistic trading windows (i.e., just before the earnings announcement) after an SEC enforcement action. These more opportunistic trades are more likely to occur just prior to more informative earnings announcements and in the direction of the news revealed during the subsequent earnings announcement. Our results suggest that non-targeted insiders at industry peers are more likely to exploit material, non-public information for personal gain after an SEC enforcement action. We find that non-targeted insiders are more likely to execute opportunistic trades when the SEC is more resource constrained, non-targeted insider trades are
less likely to attract SEC attention, and the firm employing the non-targeted insider is less likely to receive SEC scrutiny. Overall, our results question the effectiveness of the SEC in deterring opportunistic insider trading among non-targeted insiders employed by industry peers.