Cancellable Insider Trading Plans: An Analysis of SEC Rule 10b5-1

Stephen L. Lenkey

doi:10.1093/rfs/hhz035

Cancellable Insider Trading Plans: An Analysis of SEC Rule 10b5-1

Stephen L. Lenkey

Finance

Research output: Contribution to journal › Article › peer-review

5 Scopus citations

Abstract

Rule 10b5-1 enables insiders to preplan future trades before becoming informed. Within a strategic rational expectations equilibrium framework, I characterize an insider's unique optimal trading plan, which balances portfolio diversification against exploitation of the rule's selective termination option. Because the rule reduces adverse selection and provides insurance against bad outcomes, the rule generally improves welfare for both the insider, who later becomes informed, and uninformed outsiders, provided there exists a sufficient degree of information asymmetry. Eliminating the rule's selective termination option results in an even greater welfare improvement under a large subset of parametric conditions. Received March 9, 2018; editorial decision January 11, 2019 by Editor Wei Jiang.

Original language	English (US)
Pages (from-to)	4947-4996
Number of pages	50
Journal	Review of Financial Studies
Volume	32
Issue number	12
DOIs	https://doi.org/10.1093/rfs/hhz035
State	Published - Dec 1 2019

All Science Journal Classification (ASJC) codes

Accounting
Finance
Economics and Econometrics

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10.1093/rfs/hhz035

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abstract = "Rule 10b5-1 enables insiders to preplan future trades before becoming informed. Within a strategic rational expectations equilibrium framework, I characterize an insider's unique optimal trading plan, which balances portfolio diversification against exploitation of the rule's selective termination option. Because the rule reduces adverse selection and provides insurance against bad outcomes, the rule generally improves welfare for both the insider, who later becomes informed, and uninformed outsiders, provided there exists a sufficient degree of information asymmetry. Eliminating the rule's selective termination option results in an even greater welfare improvement under a large subset of parametric conditions. Received March 9, 2018; editorial decision January 11, 2019 by Editor Wei Jiang.",

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Cancellable Insider Trading Plans: An Analysis of SEC Rule 10b5-1

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