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17-02-2021 | Original Paper

# On the Ethics of “Non-Corporate” Insider Trading

Authors: Benjamin M. Blau, Todd G. Griffith, Ryan J. Whitby

Published in: Journal of Business Ethics | Issue 1/2022

## Abstract

The ethical considerations of insider trading have been widely debated in the academic literature (see e.g., Moore in J Bus Ethics 9(3):171–182, 1990). In 2013, the STOCK Act, which was initially passed to mitigate insider trading by government officials, was quickly and unexpectedly amended to allow certain government employees to withhold their financial information. To identify and quantify the potential costs placed on investors by non-corporate insider traders, we use the unusual circumstances surrounding this amendment. For a sample of stocks most held by members of Congress, we find that, relative to control stocks, liquidity significantly worsens and volatility increases during the post-amendment period. Our results highlight the costs that are incurred by investors in the presence of non-corporate insider trading. These findings call for a stronger development of an ethical framework that justifies the restriction of all types of insider trading.
Footnotes
1
Several studies highlight that insider trading resolves uncertainty about the value of firms and leads to security prices that are more informationally efficient—or prices that fully reflect relevant information (see Manove 1989; Ausubel 1990; Seyhun 1992; Allen and Gale 1992; Benabou and Laroque 1992; and Bhattacharya and Nicodano 2001). Martin and Peterson (1991) use the price efficiency improvements noted above to make an ethical argument that supports insider trading.

2
Ahmed et al. (2010) show that the net realized costs associated with the Sarbanes Oxley Act amount to roughly \$19 billion per year for their sample firms.

3

5
There exists anecdotal evidence that congressional staffers also engage in the trading of securities while possessing non-public information. While data regarding the trading behavior of staffers is unavailable, the anecdotes seem to suggest that congressional aids and staffers might also benefit financially from trading on non-public information. See, for example, https://​www.​wsj.​com/​articles/​SB10001424052748​7034316045755224​34188603198. https://​www.​politico.​com/​story/​2017/​09/​25/​congress-aides-stock-market-trades-investments-analysis-242692.

8
Our results are robust to various event windows, such as 21-day, 61-day, and 91-day periods.

9
Choosing the 50 stocks that were held by the most members of Congress is based on the public availability of data from the CRP. Also, we do not want to add to our treatment sample stocks that are held by only a few members of Congress.

10
We note that data regarding the number of shares held by Congress is not widely available. We note, however, that for the purposes of our tests, the number of Congressional members holding the stock may be more relevant. For instance, the effect of the STOCK Act Amendment will likely affect the market quality of a stock held many members of Congress rather than a stock held by only a few members of Congress—even if the total percent of shares outstanding held is lower for the former vis-à-vis the latter.

11
There are only a few securities in the top 50 most held by Congress that change between 2012 and 2013.

12
We use the Lee and Ready (1991) algorithm to determine whether a given trade is a buy or sell. Under this convention, a trade is a buy when $${P}_{k}$$ > $${M}_{k}$$, a sell when $${P}_{k}$$ < $${M}_{k}$$, and the tick test is used when $${P}_{k}$$ = $${M}_{k}$$. The tick test determines a trade is a buy (sell) if the most recent prior trade at a different price was at a lower (higher) price.

13
To avoid violating the full rank condition required for consistent estimates, we drop a random day during the sample period in order to include both day fixed effects and the indicator variable After.

14
We do not find that the decline in average depth at the NBO is more significant than the decline in average depth at the NBB. Therefore, we fail to find significant order imbalance surrounding the STOCK Act amendment for treatment stocks, relative to controls stocks.

15
We conduct a series of robustness tests. First, we use a different approach than those discussed above by using as the dependent variables, the difference between the market quality measures for the treated stocks and the average market quality measures for the control sample stocks. Results from these unreported tests are qualitatively similar to those reported in Tables 3, 4, 5 and 6. Second, we replicate the multivariate results using market quality measures without taking the natural logs of the dependent variables. Again, results are qualitatively similar. Finally, we extend our multivariate results by including an indicator capturing NASDAQ listed stocks and a triple difference that attempts to determine whether our results are driven by listing on a particular exchange. Here, we do not find a reliable triple difference estimator.

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Title
On the Ethics of “Non-Corporate” Insider Trading
Authors
Benjamin M. Blau
Todd G. Griffith
Ryan J. Whitby
Publication date
17-02-2021
Publisher
Springer Netherlands
Published in
Journal of Business Ethics / Issue 1/2022
Print ISSN: 0167-4544
Electronic ISSN: 1573-0697
DOI
https://doi.org/10.1007/s10551-021-04739-x

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