The following post comes to us from Diane Del Guercio of the Department of Finance at the University of Oregon, and Elizabeth Odders-White and Mark Ready, both of the Department of Finance, Investments, and Banking at the University of Wisconsin.
In our paper, The Deterrence Effect of SEC Enforcement Intensity on Illegal Insider Trading, which was recently made publicly available on SSRN, we argue that dramatic changes in insider trading enforcement since the 1980s enable us to empirically identify the effects of more aggressive enforcement on trader behavior and stock price discovery. First, the types of trades that expose individuals to legal liability has broadened in scope since the 1980s, extending far beyond the original principles of those with a fiduciary duty to the stock traded (Nagy, 2009; Bainbridge, 2012). Second, punishments for successfully prosecuted traders have become more severe, while at the same time the amount of resources devoted to enforcement has increased dramatically. For example, the SEC’s budget in real terms is over four-times larger today than it was in the 1980s. Finally, high-profile insider trading cases (e.g., Galleon) and recent developments in SEC enforcement have both received extensive press coverage, suggesting that regulators have been actively signaling their increased enforcement aggressiveness. We posit that traders are aware of these developments and test whether more aggressive SEC enforcement effort deters illegal insider trading and affects price discovery.