Insider trading restriction enforcement, investor protection, and innovation

Abstract

US Securities and Exchange Commission (SEC) enforcement actions are intended to protect investors and limit expropriation by firm insiders, but these SEC actions could affect insiders' incentives to contribute to value-enhancing activities. Therefore, we explore how corporate innovation and performance respond to insider trading restrictions imposed by regulators and firms. Using manually collected data on SEC indictments against corporate insiders, we document more innovative activity following external insider trading restrictions. External restrictions are also followed by higher corporate investment, capital access, and operating performance. Similarly, internal blackout restrictions to insider trading are linked to more innovation as well. We use SEC and congressional rule changes as quasi-natural experiments resulting in shocks in enforcement and indictments for identification and inference. Our results suggest insider trading restrictions and enforcement actions affect subsequent firm activities and managerial decisions by protecting outside investment, resulting in more investment in innovation.