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Cutting corners: Companies typically dread a knock on the door from the SEC (Securities and Exchange Commission). After all, an unannounced visit from these watchdogs often signals serious trouble. However, a new study suggests that some insiders may possibly be getting tipped off about these visits – and are cashing out their shares to avoid stock losses.
New research around stock behavior led by professors from universities across the Midwest took a novel approach. The academics 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.
They found that at 84% of the companies "visited" by the SEC's roaming phones, the brass was in the dark about any incoming enforcement action. Yet, three months after these visits, the average stock price had declined around 1.94% compared to the wider market.
The most striking finding, however, was that companies where insiders sold shares around the time of these visits experienced steeper stock price drops, averaging 4.9% in the three months following the visit.
Now, to be clear, the mobile tracking couldn't differentiate between routine SEC inspectors or the feared enforcement team that builds cases. The research also doesn't explicitly point towards insider trading – it just signals some eyebrow-raising correlations. But the implications are curious.
Overall, insider selling actually dipped 16% in the two weeks surrounding a stealth SEC visit. Drilling deeper, at firms hit with an enforcement action post-visit, insiders were even more likely to clutch their shares in a "best behavior" clampdown. However, at the smaller subset of companies where insiders quickly unloaded stock around the time of the visit, the shares experienced even larger declines.
As for why the stocks dropped, the researchers offer a couple of theories. Marcus Painter, assistant professor of finance at Saint Louis University and one of the study's authors, told the Financial Times that SEC visits might "distract" staff and management. Alternatively, rumors of the agency's presence could have leaked, spooking investors into selling.
In related news, the SEC blocked the use of third-party messaging apps and texts on employee work phones in April, aligning with the standards enforced on the financial industry. The agency has issued $3 billion in fines to firms for failing to maintain adequate records of mobile communications.
As regulators tighten policies, this new study raises questions about whether companies can fully control insider trading risks.
Image credit: Santeri Liukkonen