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Profits to opportunistic insider trading before and after the Dodd-Frank act of 2010

Partha Gangopadhyay (Herberger Business School, St. Cloud State University, St. Cloud, Minnesota, USA)
Ken Yook (Johns Hopkins Carey Business School, Baltimore, Maryland, USA)

Journal of Financial Regulation and Compliance

ISSN: 1358-1988

Article publication date: 31 July 2021

Issue publication date: 13 January 2022

197

Abstract

Purpose

The authors examine if opportunistic insider trading profits decrease after the enactment of the Dodd-Frank Act (DFA) in 2010. The DFA expands legal prohibitions on insider trading in the USA.

Design/methodology/approach

The authors identify opportunistic insider trades following a method that is outlined in Cohen et al. (2012). The authors examine univariate statistics and perform multivariate regression tests to examine opportunistic trading profits before and after the DFA. Similar multivariate regression tests have been used widely in the literature to examine the profitability of insider trades.

Findings

The authors find that opportunistic insider purchases were highly profitable before the DFA. Profits after opportunistic purchases were significantly lower after the DFA. Opportunistic insider sales were contrarian trades both before and after the DFA. However, share prices kept increasing after insiders sold their shares.

Originality/value

To the best of the authors’ knowledge, the paper is the first study that compares the profitability of opportunistic insider trades, as identified by Cohen et al., before and after the DFA. The study contributes to the literature that finds that insiders change their strategic trading behavior when the potential costs of the illegal trading increase due to regulatory action.

Keywords

Citation

Gangopadhyay, P. and Yook, K. (2022), "Profits to opportunistic insider trading before and after the Dodd-Frank act of 2010", Journal of Financial Regulation and Compliance, Vol. 30 No. 1, pp. 43-59. https://doi.org/10.1108/JFRC-02-2021-0018

Publisher

:

Emerald Publishing Limited

Copyright © 2021, Emerald Publishing Limited

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