Inho Suk is Associate Professor of Accounting and Law at the State University of New York at Buffalo School of Management; and Mengmeng Wang is Assistant Professor of Accounting and Finance at University of North Carolina at Greensboro Bryan School of Business and Economics. This post is based on their recent paper, forthcoming in the Journal of Financial Economics. Related research from the Program on Corporate Governance includes Insider Trading Via the Corporation by Jesse Fried (discussed on the Forum here).
In our paper forthcoming in the Journal of Financial Economics, we raise a question: can a firm looking for a takeover target use a target firm’s net insider buying as a signal of the potential worthiness of this acquisition? Prior studies have not examined the implication of insider trading for the outcomes of corporate mergers and acquisitions (M&As), possibly due to target insiders’ uncertain foreknowledge about acquisition outcomes and the stringent insider trading regulations prior to M&As. Our study fills this void by investigating whether target firm insider trading helps to reduce the “lemons” problem in the M&A market.
Corporate insiders’ trading activities are often used as a way to sign various potential firm-level events (e.g., dividend policy changes, seasoned equity offerings, open market share repurchases, corporate disclosures, etc.) as good or bad. However, it is not ex ante clear whether target insider trading can be used to infer the success of future M&As because the informational implications of target insider trading for acquisition outcomes are quite different from those of insider trading for the outcomes of other corporate events. In particular, prior to M&As, (1) target insiders are often uncertain about the bidder’s synergy potential, sometimes even lacking the knowledge of a potential acquisition, and (2) the Short Swing rule (i.e., SEC rule Section 16b), which requires any profits earned by insiders on round trip trades within any six-month period to be paid back to the firm, curbs target insiders’ trading prior to takeovers more severely than insider trading prior to other corporate events because takeover completion forces the sale of the target stock. (Facing any upcoming corporate events other than M&As, however, insiders can avoid the violation of the Short Swing rule simply by holding the stock over six months. If the limited target insider trading prior to M&As is unlikely to reflect target insiders’ private information, it would not be informative of M&A outcomes.) Due to these dissimilarities in the information structure and the regulatory environment of insider trading between M&As and other firm-level events, it is a discrete and important empirical issue to test whether target firm insider trading helps to reduce the adverse selection problem in the M&A setting.
Comment Letter on Rule 144 Holding Period and Form 144 Filings
More from: Bradford Lynch, Daniel Taylor, David Larcker
Daniel Taylor is Associate Professor of Accounting at the Wharton School of the University of Pennsylvania; Bradford Lynch is a PhD student at The Wharton School; and David F. Larcker is the James Irvin Miller Professor of Accounting at Stanford Graduate School of Business. This post is based on their recent comment letter to the U.S. Securities and Exchange Commission.
We applaud the Commission for putting forth the Proposed Rule 144 Holding Period and Form 144 Filings (“Proposal”) and appreciate the opportunity to comment. Our comments and analysis relate primarily to the request for comments in Sections I.C.2, II.D, and III.D of the Proposal.
The Proposal would meaningfully alter the reporting requirements surrounding the trades of corporate insiders reported on Form 144 and Form 4. Having studied the trading of corporate insiders for over a decade, written numerous academic studies on the topic, and consulted with multiple companies, counsels, and enforcement agencies, we believe that the Proposal will substantially benefit the public interest with minimal or no cost to filers.
We support the modernization of Form 144. Under the current rule, 99.3% of Form 144s are filed on paper every year (over 700,000 from 2001 to 2020). The Commission’s current practice is to retain hard copies of these paper filings for 90 days in the Commission’s Public Reading Room in Washington DC and not post them on EDGAR (see Exhibit 1 for an example of a Form 144). This arcane practice would be of little consequence if the information contained in Form 144s was of no interest to investors; on the contrary, the demand for information on these Form 144s is sufficiently high that data providers regularly visit the Reading Room to scan, digitize, and disseminate Form 144s to corporate clients. As a result, data on over 700,000 Form 144s is available from third-party data providers (e.g., The Washington Service and Thomson/Refinitiv) but not EDGAR. In effect, the Commission has created a two-tiered disclosure system that makes “public disclosure” accessible to large institutional clients, but inaccessible to individual investors. The Proposal would end this practice by mandating Form 144 be filed electronically on EDGAR.
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