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Late Disclosure of Insider Trades: Who Does It and Why?

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Abstract

We attempt to understand the personal incentives that motivate corporate insiders to engage in unethical behavior such as delayed trade disclosure. Delayed disclosure affects corporate transparency and other shareholders in the firm potentially suffer investment losses because they are unaware of insiders’ activities. Using archival data from the 300 largest Australian firms between 2007 and 2011, the results show that risk factors such as insider age and tenure and wealth effects in the form of insider shareholdings affect the likelihood of delayed reporting. Governance positions such as committee membership mitigate this behavior. Our study highlights the importance of considering individual insider’s wealth and risk factors. The self-monitoring role of governance positions is also indicative of the effectiveness of internal corporate governance in the prevention of illegal insider behavior.

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Notes

  1. This is only true in a positive law regime (where government creates rights that did not exist previously). In a negative rights regime, the rights of these shareholders are not violated because they have no rights to information that does not belong to them. That is, there is no legal or moral duty to disclose. We thank the anonymous reviewer for bringing this point to our attention.

  2. The late reported trade metric is measured by number of shares. To ensure that stock splits are detected, the beginning and end balances of insider stockholdings (in terms of number of shares) are compared for each financial year. Furthermore, such close examination of the beginning and year end stockholding balances allows us to re-estimate net late reported trading each year such that any late reported trading in one financial year is not carried over into the next year. For each reported trade, particularly those conducted near the end of the financial year, a 15 trading day allowance is made for the reporting of the trade. This is due to the s205G disclosure requirement allowing directors to report up to 14 days after the trade.

  3. The censoring at the lower limit of 500 shares resulted in the reduction of 120 cases while at the upper end, the figure was 53.

  4. Firms in the sample were allocated into size deciles based on market capitalisation, where Decile 1 consists of the smallest firms and Decile 10 the largest firms. Small firms are defined as those belonging to Deciles 1, 2, and 3 while large firms belong in Deciles 8, 9, and 10.

  5. Experience is not significant in the executive director-large firm regression.

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Authors and Affiliations

  1. UWA Business School, The University of Western Australia, Crawley, WA, 6009, Australia

    Millicent Chang & Yilin Lim

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  1. Millicent Chang
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  2. Yilin Lim
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Correspondence to Millicent Chang.

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Chang, M., Lim, Y. Late Disclosure of Insider Trades: Who Does It and Why?. J Bus Ethics 133, 519–531 (2016). https://doi.org/10.1007/s10551-014-2413-3

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  • DOI: https://doi.org/10.1007/s10551-014-2413-3

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