Companies usually dread a knock on the door from the Securities and Exchange Commission (SEC). However, a new study suggests that some insiders may be getting tipped off about these visits – and are cashing out their shares to avoid stock losses.
Professors from universities across the Midwest used commercially available mobile phone location data to track devices spending significant time around SEC offices. They then traced those devices traveling to corporate headquarters in the year before the Covid lockdowns. The researchers found that at a significant number of the companies “visited” by the SEC’s roaming phones, the brass was in the dark about any incoming enforcement action.
However, the most striking finding was that companies where insiders sold shares around the time of these visits experienced steeper stock price drops. This has raised questions about whether companies can fully control insider trading risks.
Overall, insider selling actually dipped in the two weeks surrounding a stealth SEC visit. However, at the smaller subset of companies where insiders quickly unloaded stock around the time of the visit, the shares experienced even larger declines. Researchers offer a couple of theories, including that SEC visits might “distract” staff and management, or that rumors of the agency’s presence could have leaked, spooking investors into selling.
The study’s findings have implications for regulators and companies. As regulators tighten policies, it remains to be seen whether companies can fully control insider trading risks.