Over the two-year period prior to the bankruptcy announcement, insider trading is significantly greater for OTC bankrupt firms, but not for exchange-listed firms, than for an industry-size matched sample of nonbankrupt firms. In addition, the level of insider selling increases over the final five months leading to the first public announcement of OTC firms. Finally, firms displaying the most negative price reaction over the announcement period are found to have a significantly larger proportion of insider selling than other firms.A NUMBER OF STUDIES, using the information contained in the SEC's Official Summary of Securities Transactions and Holdings, have examined the profitability of insider trading. In general, these studies have found that insiders, using monopolistic information to their advantage, have been able to generate abnormal returns trading in their stocks. In fact, several studies have found that non-insiders may be able to participate in these abnormal profits by using the information contained in the "Official Summary." This has created a small industry that provides and analyzes insider trading reports. Interestingly, a recent study by Loderer and Sheehan (1989) reports that prior to a bankruptcy, an event which generally results in a major drop in share price, there is little evidence that insiders reduce their stockholdings or hold less stock compared to insiders in similar firms that did not go bankrupt.Our study examines whether insiders trade in a systematic pattern to avoid bankruptcy losses. Specifically, we examine the pattern of insider trading surrounding the first public announcement of a filing for bankruptcy while differentiating between exchange-listed and OTC stocks. The benefit to the insider of trading prior to a bankruptcy announcement is documented by Clark and Weinstein (1983) who show that shareholders experience large
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