Law & Economics Working Papers
This study examines implications of "scienter disclosure" through an analysis of voluntary disclosures regarding insiders' Rule 10b5-1 trading plans. Prior theory suggests that disclosing informed traders' intent to trade is not strategically advantageous, but this theory does not account for litigation risk reduction resulting from disclosure. Legal precedent regarding Rule 10b5-1 affords legal risk reduction to disclosure, therefore voluntary disclosure offers an interesting theoretical test. Evidence indicates that Rule 10b5-1 disclosure increases with firm litigation risk and insider strategic trade potential. Evidence also indicates that Rule 10b5-1 disclosure is associated with greater abnormal returns to insiders' trades, especially for firms disclosing specific plan details. This evidence suggests that legal risk can compel firms to depart from a non-disclosure strategy and that disclosure might enhance strategic trade. Evidence also suggests that non-disclosing firms are least associated with strategic trade; therefore proposed mandatory Rule 10b5-1 disclosure might not mitigate strategic behavior. Keywords: Rule 10b5-1; voluntary disclosure; insider trading JEL Classification: D82; G38; K22; M52
Karl Muller, Alan Jagolinzer & M. Todd Henderson, "Scienter Disclosure" (John M. Olin Program in Law and Economics Working Paper No. 411, 2008).