Bankruptcy and Insider Trading: Differences Between Exchange-Listed and OTC Firms

Abstract

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

Why Do Insiders Sell Shares Following IPO Lockups?

“…In Table VI, we test the sensitivity of the results in Tables IV and V using two measures of abnormal inside trading similar to those used in Seyhun (1990), Karpoff and Lee (1991), Gosnell, Keown, and Pinkerton (1992), Lee et al (1992), Gombola, Lee, and Liu (1997), and Seyhun and Bradley (1997). Abnormal insider trading is measured by an IPO firm's insider net sales minus its size and book‐to‐market matched firm's insider net sales, where insider net sales are defined as insider sales minus insider purchases.…”

Bank Mergers and Insider Nontrading

“…Although regulatory deterrents to illegal insider trading exist, several studies suggest that corporate insiders do earn positive abnormal returns on their trades, including those trades surrounding important firm-specific events. For example, Seyhun and Bradley (1997) and Gosnell, Keown, and Pinkerton (1992) found that insiders exhibit abnormal selling behavior prior to bankruptcy. Park, Jang, and Loeb (1995) found that insiders trade profitably around earnings announcements.…”

CEO Compensation in Financially Distressed Firms: An Empirical Analysis

“…88Loderer and Sheehan (1989) observe no significant decline in insiders' percentage stock ownership prior to bankruptcy for a sample of firms that filed for Chapter 11 during 1971 to 1985, whereas Gosnell, Keown, and Pinkerton (1992) report significantly greater insider selling activity for OTC bankrupt firms over the period 1985 to 1987.…”