The Role Of The Media In Disseminating Insider-Trading Activity

Jonathan L. Rogers

University of Colorado at Boulder – Leeds School of Business

Douglas J. Skinner

The University of Chicago – Booth School of Business

Sarah L. C. Zechman

University of Chicago – Booth School of Business

April 1, 2015

Chicago Booth Research Paper No. 13-34

Fama-Miller Working Paper

Abstract:

We use the disclosure of insiders’ trades to investigate whether the manner in which news is disseminated by the media affects the way securities markets respond to news. To do this, we utilize recent changes in disclosure rules governing insider trades to cleanly identify media effects. Using high-resolution intraday data, we find clear effects of media disclosure on the way prices and volume respond to news. These results help to resolve open questions regarding the importance of investor inattention and why apparently “second hand” news affects securities prices.

The Role Of The Media In Disseminating Insider-Trading Activity – Introduction

A growing literature explores the role of the media in financial markets and in particular whether and how the media influences prices and trading activity. While there is a growing consensus that the media can help discipline managers, reduce information asymmetry among market participants, and affect the market response to information, we still lack a clear understanding of the mechanism through which this occurs. 1 Many settings of interest to researchers make it difficult to separate the various roles that the media can play. In the context of earnings announcements, for example, the release of the underlying earnings news results almost immediately in the generation of additional related content, in the form of discussion and analysis by the media, by securities analysts, and more recently by other actors on social media.

The dissemination of insiders’ trades via the SEC’s EDGAR system is a powerful setting for understanding the role of the media for at least two reasons. First, details of insiders’ trades first become available through SEC (Form 4) filings, which are simple, standardized documents, resulting in limited managerial discretion as to the timing or content of the news. This is in contrast to, say, earnings announcements where management has discretion over both timing and content of the news (e.g., Doyle and Magilke, 2009). Second, the media coverage that immediately follows insider filings simply regurgitates facts about the trade—who made the trade, when, how many shares, and at what price—without generating additional content. This also contrasts with earnings announcements, for which additional, related content is almost immediately produced and disseminated by the media. Moreover, media coverage of earnings announcements, like media coverage more generally, is fundamentally endogenous, with the existence, nature, and extent of coverage likely depending on informational aspects of the news. Because of the mechanical nature of the media coverage we use as well as our natural experiment (described below), our approach enables us to clearly identify media coverage effects, and so provide a useful complement to existing approaches in the accounting literature.

Around 2002, the SEC made two changes in the rules that govern the filing and dissemination of insider trades that facilitate our tests. First, in 2002, the SEC substantially shortened the time between an insider trade and when information about that trade has to be filed with the SEC. Prior to the change in regulation, insiders had up to 10 days after the end of the calendar month in which the trade occurred to file the requisite information (Form 4) about the trade with the SEC. This often led to delays of more than a month between the trade and its disclosure to the public (e.g., Seyhun, 1986). After the rule change in 2002, insiders were required to make these filings within two business days of the trade. Evidence suggests that most filings are now made within two business days of the trade (Brochet, 2010; Rogers et al., 2015). Second, prior to 2002, it was not clear exactly when outside investors could access the information in SEC filings. In June 2003, the SEC required that these filings be made electronically, via its online EDGAR system, meaning that the information should be instantaneously available to outside investors and that there is no ambiguity about when the data becomes publicly available, a process discussed in some detail by Rogers et al. (2015).

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