According to a new study, company executives saved millions of dollars by selling large amounts of stock before the stock began to underperform. The study showed that when misfortune was imminent, company officials would cash out.
When the company insiders used the pre-arranged stock trading plan to quickly sell 50 million US dollars or more in a day, the company’s stock subsequently lags behind its peers by 3.19% in the next month, and in the next six It is 5.75% behind its peers in the month. Research conducted by Daniel Taylor, Professor of Accounting and Director of the Forensic Analysis Laboratory at the Wharton School of Business.
The study surveyed company insiders who sold shares within 60 days of adopting the so-called 10b5-1 plan.
These plans allow executives, board members, and other company insiders to sell shares within a predetermined time frame and price range. They are designed to act as a safe haven for insider trading violations by setting stock trading to occur passively. But critics say these plans can trigger stock sales when it is in the best interests of executives.
Taylor is one of a group of academics who say they have discovered red flags in the company’s insider stock sales in recent months. As the U.S. Securities and Exchange Commission began to draft a regulation that requires greater transparency in company insider transactions, their research is receiving attention.
In June, SEC Chairman Gary Gensler, Say He had asked agency staff to formulate a rule to “update” the 10b5-1 rule finalized in 2000.
US Securities and Exchange Commission Commissioner Caroline Crenshaw said in an interview that company executives often deal with sensitive non-public information and pay mainly in stocks-this combination “causes executive transactions that may be affected by inside information. The real risk”.
She praised Gensler for calling for a new 10b5-1 rule, and Say Previously, companies should disclose when adopting plans.
“The biggest part of these 10b5-1 plans is confidence in the market [and] Knowing that this is a fair system, executives don’t just make money for themselves,” she said.
The largest stock sale in Taylor’s sample ($50 million or more) indicates the worst stock price performance in the coming months.
Taylor said that with the 10b5-1 plan to prevent insider trading violations, “The Securities and Exchange Commission gave executives a shield, and they used it as a sword.”
Concerns about the timing of executive stock sales were highlighted last year when Pfizer CEO Albert Bourla cashes in stock On the same day the company announced positive news about the Covid-19 vaccine.
The surge in Pfizer’s stock price brought Bourla $5.6 million in paydays. The company said at the time that the stock sale stemmed from the pre-arranged 10b5-1 plan.
After the sale, a group of senators including Massachusetts Democrat Elizabeth Warren called on the US Securities and Exchange Commission to improve disclosure rules. “The abuse of the 10b5-1 program seems to have caused significant disadvantages to other investors,” Warren and two colleagues Say In a letter to the US Securities and Exchange Commission in February.
Research shows that when the company has good news to disclose and the stock price rises, the company triggers executives to sell the stock.
A paper published last year by Columbia University law professor Joshua Mitts found that when the good news was announced, the number of shares and dollar amounts sold as part of the 10b5-1 plan were higher. He said that when a company discloses good news, the health care industry has the largest sales of stocks.