On September 7, 2015, a new study on the “8-K trading gap” conducted by researchers at Harvard and Columbia law schools was released. The “8-K trading gap” refers to the four business day period before SEC reporting companies must file a current report on Form 8-K, disclosing, among other things, significant corporate events, including material acquisitions and the execution of material contracts and other agreements. During this period, material non-public information is known by a company’s insiders (directors, officers and 10% owners) but not the larger investing public. The study specifically examined a set of over 15,000 Form 8-K filings from 2004 to 2014 and how insiders traded their company’s stock during the 8-K trading gap (the study though did not examine the trading patterns of 10% owners). The study showed, among other things:
- Systematic abnormal returns of 42 basis points on average, per trade, from trades by insiders during the 8-K trading gap.
- Even larger abnormal returns of 163 basis points when insiders engage in an unusual transaction during the 8-K trading gap (e.g., open-market purchases of their own company’s stock).
- When insiders engage in such purchases, they are correct about the directional impact of the 8-K filing more often than not, and the probability that this finding is the product of random chance is virtually zero.
- Without reference to any specific insider transaction, a trading strategy of buying on the date an agreement is executed and selling immediately before the agreement is disclosed yields, on average, abnormal returns of 35.4 basis points.
- Insiders are more likely to engage in open market purchases of their own company’s stock when the company is about to reveal new agreements with customers and suppliers.
The study cautioned that (1) the findings in no way establish that insiders in the sample have engaged in illegal or improper conduct, (2) the findings do not establish the causal direction of the relationship between the 8-K trading gap and trading by insiders, (3) the findings do not show that profitable trading by insiders is caused by Form 8-K filings, and (4) information disclosed in a Form 8-K could be made public before the Form 8-K is filed. However, the study recommended that policymakers should reconsider the requirements of Form 8-K and their effect on the incidence and profitability of trading by insiders and whether the nature of the underlying information itself should shape the disclosure rule that governs whether and when that information will be disclosed to the public.
A copy of the study is available at http://www.valuewalk.com/2015/09/the-8-k-trading-gap/.