The Impact of Mandatory Close Periods on Corporate Insider Trading

Abstract

The Market Abuse Regulation (MAR)—which took effect in July 2016 in the European Union—prohibits corporate insiders from trading within 30 days prior to earnings announcements. Using country-level heterogeneity in pre-MAR regulation on closed periods to distinguish treated from control observations, we examine the effect of the mandate on corporate insider trading patterns and information asymmetry around earnings announcements. In terms of compliance, we find a statistically significant decrease in the incidence, amount, and profitability of insider trades in the 30 days preceding earnings announcements in treated relative to control countries. In terms of capital market effects, while we find an average decrease in bid-ask spread and illiquidity for treated relative to control countries, there is a significant relative increase during the 30-day window preceding earnings announcements. The latter effect is driven by firms with less transparent information environments. Hence, the evidence suggests that, while mandated closed periods are effective at curtailing corporate insider trading during information-sensitive windows, they do not reduce market-level information asymmetry. Overall, the evidence does not suggest that one-size-fits-all regulation of close periods achieves better capital market outcomes than firm- or country-specific policies.