Pre-announcement of Insiders’ Trades†

We consider the implications of a regime change regarding the timing of reports of trades made by corporate insiders. Presently, insiders report their trades after the fact; however, recently there have been renewed calls for insiders to pre-announce their trades to curb insiders’ ability to profit from their information advantage. Pre-announcement by insiders removes noise trades as source of disguise, implying that insiders can no longer realize such profit. Of course, insiders also trade for other unobservable motives. This too is a source of disguise, but a dysfunctional one because it serves as an incentive to distort trades from those that would be optimal otherwise. As a consequence, insiders may be predisposed to favor accounting standards that expand public disclosures pertaining to firm value. A mitigating factor is the price risk caused by disclosures made in advance of trade. These phenomena are present even without pre-announcement and become more prominent as markets become thinner.