When a significant event happens at a public company, federal law requires the firm to disclose it in a securities filing known as a Form 8-K. But the company doesn’t have to disclose right away: SEC rules give companies four business days after the event to file an 8-K. So these rules create a period during which market-moving information is known by insiders but not most public-company investors—a period we call the 8-K trading gap. The Millstein Center’s most recent working paper, The 8-K Trading Gap, shows that insiders enjoy systematic abnormal returns when trading in the 8-K gap. The interactive chart below presents selected examples of the trading by insiders in our dataset.
Before presenting those data, however, we wish to emphasize that our evidence in no way establishes the existence of illegal or improper conduct. As explained in The 8-K Trading Gap, the laws governing insider-trading liability are exceptionally complex, requiring proof of many matters that our data do not, and cannot, explain. The mere occurrence of an insider’s transaction during the 8-K gap is insufficient to establish liability of any kind under the securities laws. Nevertheless, because many readers have expressed interest in the activity uncovered in The 8-K Trading Gap, we have provided examples from our dataset below. We welcome comments and questions on our research; please reach out to Columbia Law School Professor Robert Jackson, at firstname.lastname@example.org, or Postdoctoral Fellow Joshua Mitts, at email@example.com, if you are interested in learning more.
Significant detail on how we constructed and analyzed our dataset is provided in The 8-K Trading Gap. For purposes of this chart, however, we wanted to emphasize four important methodological choices we made—and why we made them.
First, as noted in our paper, the abnormal profits we calculate above are only a rough approximation of insiders’ performance when trading in the 8-K gap. In fact, insiders could not legally immediately realize the profits described in the chart above. The reason is that Section 16(b) of the Securities Exchange Act of 1934 strictly prohibits public-company insiders from retaining profits they earn through what is called “short-swing” trading—that is, trades in opposite directions within six months of each other. Under Section 16(a), if insiders conduct a purchase following a sale, or a sale following a purchase, during a six-month period, any profits from those transactions must be disgorged to the firm. So any insider described in the chart above who attempted to sell immediately in order to realize these profits would be required, in a subsequent suit by the SEC or a private party, to disgorge those profits to the company. In general, The 8-K Trading Gap does not consider whether and how insiders can exit from these positions. Instead, we simply estimate how much better, on the margin, insiders do by buying or selling their own company’s stock as compared to the market.
Second, as also explained in the paper, in calculating insider profits we do not utilize the transaction price that is reported on Form 4. Form 4 disclosures do not include the precise time of day when the insider’s trade was executed, making it impossible to calculate a comparable market return for these trades when using the reported transaction price. And it’s not clear how reliable self-reported transaction-price data are; they are occasionally missing from Form 4 filings and may feature self-reporting bias. Instead, for each trade you see above, we calculated the insider’s abnormal return from the closing price of the day of the insider’s trade to the closing price of the day after the day on which the Form 8-K filing is made.
Third, to evaluate the profitability of trades by insiders during the 8-K gap, we classify trades by their direction: that is, whether the insider is effectively buying or selling her company’s stock. We use the Thomson Reuters Form 4 transaction codes to determine the nature of the insider’s transaction, as described further in The 8-K Trading Gap. As explained there, although that method is consistent with prior work in this area, methodological objections could be raised to that approach. We attempt to deal with those objections in Part 4 of our paper.
Finally, in assembling the chart above, we limited the examples we provide to purchase-like transactions where the insider takes a “long” position in the company’s stock—that is, bets that the stock will rise—during the 8-K trading gap. Of course, these examples do not provide the full story. In The 8-K Trading Gap, we consider a much broader set of cases—and use statistical methods to establish the existence of systematic abnormal returns to trading by insiders during the 8-K gap.