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Stanford Business magazine

 

Extra Credit

Do SEC Rules on Insider Trading Really Protect?

A seven-year-old rule designed by the Securities and Exchange Commission to keep permitted insider trades from hurting others in the market may not be achieving its goal, says Business School researcher Alan Jagolinzer.

Rule 10b5-1 allows executives, directors, and employees of public companies to buy and sell shares in their companies via automatic plans that—once they are initiated—function without direct input from the owner. By trading within the plans, insiders are better protected from securities lawsuits, which are often associated with the selling of shares by insiders. The rule specifies that insiders may not plan trades while in possession of material, nonpublic information.

“If the rule was intended to allow only random trades for the purpose of diversification, it doesn’t appear to be doing that,” said Jagolinzer, an assistant professor of accounting, after he looked at five years of trading activity. On average, he found trades conducted under 10b5-1 outperformed the market by about 6 percent six months after the trades were executed. This association, he said, was statistically very strong, suggesting that, on average, trades appeared more strategically timed than random.

Legal inferences cannot be drawn from his evidence because there is little information available regarding the underlying process that generates these patterns. Some possibilities are that insiders set up their plans to trade profitably with the benefit of long-term information, or they time the release of certain information—such as the pre-announcement of quarterly earnings—to enhance the profits from previously scheduled trades, or they selectively terminate their plans to prevent pending scheduled trades from executing unprofitably.

Time IS Money When You’re Paid by the Hour

People who bill or earn by the hour start thinking of time as a commodity almost equal to cash. They can tell you how much it will “cost” them to wash the car or go to a movie. And given the choice, they’re nearly always willing to put in more hours to get more pay, say Business School researchers Jeffrey Pfeffer and Sanford E. DeVoe.

In one of their studies, lawyers who were watching their kids play soccer admitted to mentally ticking away lost income for each minute they stood on the sidelines. One researcher at Warwick University has even gone so far as to calculate that the average British minute is worth a little more than 15 cents, which means that “across the pond” brushing your teeth results in 45 cents’ worth of “lost” time, while washing a car by hand has a hidden cost of $4.50.

Pfeffer, the Thomas D. Dee II Professor of Organizational Behavior, and DeVoe, a Business School doctoral student, found only employees who were not paid by the hour used different mental accounting standards for time than for money. Those paid by the hour, given the choice as to whether they’ll take time or green bills, said they’ll usually take the latter—meaning they’re nearly always willing to put in more hours to get the pay.

“This shows how a commodified view of time spills over into how people view their personal and leisure time,” Pfeffer said. The researchers also found that people paid hourly spend about 36 percent less time volunteering than salaried people.