Law & Economics Working Papers
Can voluntary disclosure be used to enhance insiders' strategic trade while providing legal cover? We investigate this question in the context of 10b5-1 trading plans. Prior literature suggests that insiders lose strategic trade value if their planned trades are disclosed. But disclosure might enhance strategic trade because courts can only consider publicly available evidence from defendants at the motion to dismiss phase of trial. This practice can enhance legal protection for firms that disclose planned trades, especially those disclosing detailed information. Consistent with increased legal protection, we find that voluntary disclosure of planned trades increases with firm litigation risk and potential gains to insiders' trades. We also find that insider sales and abnormal returns are higher for disclosed plans, especially those that articulate specific plan details. This suggests that voluntary disclosure, which is conventionally thought to reduce information asymmetries, can create legal cover for opportunistic insider trading.
M. Todd Henderson, Alan Jagolinzer & Karl Muller, "Hiding in Plain Sight: Can Disclosure Enhance Insiders’ Trade Returns?" (The Coase-Sandor Working Paper Series in Law and Economics No. 411, 2012).