An empirical analysis of insider trade within Rule 10b5-1

This thesis examines the association between insider trade behavior and participation within Rule 10b5-1 trade plans to provide evidence about how insiders respond to regulation that reduces litigation risk and how the Rule affects insiders' informed trade profits. Rule 10b5-1 includes a safe harbor provision that protects certain insiders from litigation associated with their trades. Evidence suggests the safe harbor allows insiders a better opportunity to profit from trade, which is not consistent with the traditional concept of regulatory intent. Specifically, evidence suggests participation is associated with: (1) insiders with greater personal litigation risk who likely have access to and control over disclosure of material nonpublic information; (2) a large volume increase not fully explained by proxies for insiders' diversification needs; (3) an increase in abnormal trade profits; and (4) more sales volume immediately before disclosure of negative management earnings forecasts than immediately after disclosure.; This thesis also examines firms' voluntary decision to disclose insiders' participation within Rule 10b5-1 to provide evidence of the costs and benefits associated with this disclosure choice. Evidence suggests firms disclose this information to reduce litigation costs and to reduce stock price volatility related to disclosure of insider trade activity. Specifically, disclosure is positively associated with firm size, a proxy for a firm's litigation risk, and with a measure of the firm's price sensitivity to disclosure of insiders' trades. Evidence also suggests that insiders prefer that disclosure not occur, perhaps because disclosure reduces potential trade profits. Disclosure is positively associated with a variable capturing insiders' influence over the board of directors interacted with both the firm's price sensitivity to disclosure of insiders' trades and the level of insider trading volume.