To Trade Or Not To Trade: The Strategic Trading Of Insiders Around News Announcements

In this paper, the authors analyze the strategic trading of insiders and the way insiders use short-lived private information. They argue that the decisions to trade or not to trade on foreknowledge of corporate news in short windows directly preceding the news announcements are likely to result from a trade-off between the incentives to capitalize on foreknowledge of the information content of the disclosure and the disincentives created by risk of the regulatory scrutiny. Using a large sample of directors' trades and regulatory news announcements in U.K. companies, they analyze the relationship between the price impact of news announcements and the likelihood of insider trading before the announcement.