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Department of Applied Finance and Actuarial Studies

Professor Allan Hodgson Seminar

Past Seminar from the archive

  • Topic: Insider Disclosure Regulations and Differential Cost Impacts
This paper differs from prior research on Sarbanes-Oxley (SOX) and insider trading by (i) providing an empirical insight into the direct information initiatives of SOX under §403, (ii) examining the general cost of trading for investors via the bid-ask spread, and (iii) providing a cost comparison between two forms of regulatory information disclosure.  Applying Bollen, Smith and Whaley (2004), we decompose the adverse selection cost component of the bid-ask spread and find an increase in the probability of informed trading after the SOX accelerated reporting initiative in August 2002 ― particularly for high accrual and intangible firms.  This supports the Fishman and Hagerty (1995) proposition of an increased information advantage to uninformed insiders.  However, after the company and SEC website disclosures required by SOX in July 2003 a significant lowering of the probability of informed trading and bid-ask spreads was observed possibly caused by the wider visibility to outside investors.  In summary, the regulatory disclosure form intrinsically affected the extent to which insiders traded on private information and the general cost of trading (Mendelson and Tunca, 2004).


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