Ann Arbor Times

Nejat Seyhun and Cindy Schipani, professors at the University of Michigan’s Ross School of Business, have conducted extensive research on insider trading. Despite their numerous studies and significant contributions to the field, they continue to uncover new insights about the practice. Their latest study identifies a popular strategy for insider trading.

Collaborating with Sureyya Burcu Avci from Sabanci University School of Business and Andrew Verstein from UCLA School of Law, Seyhun and Schipani's research reveals that insiders sell overvalued stock worth more than $100 billion annually, transferring losses to ordinary investors. These insiders reportedly obscure their trades by publicly reporting them in ways that confuse or discourage investigators.

The analysis of a database containing all stock trades since 1992 indicates that this method allows leaders to outperform the market by approximately 20%, without any prosecutions for these trades. The researchers argue that the current reporting system is not optimized for oversight and has weakened over the past three decades.

Seyhun explained his discovery process: "While I worked as an expert witness for the government, I noticed that during the Enron Corp. trial, even though insiders had dumped shares using both S (open-market sale) and J (other) reporting codes right up to the declaration of bankruptcy, only those transactions reported as S-codes became suspicious while transactions with J-codes were totally ignored."

Discussing regulation challenges, Seyhun compared insider trading to a "whack-a-mole" situation common in white-collar crimes: "Once a loophole is closed, the criminally minded go to their next game... This does not mean... closing loopholes and holding those who violate them responsible are fruitless efforts." Schipani echoed this sentiment: "It seems that where there is money on the table...the temptation is strong to take the money and run."

Both scholars find insider trading an enduring area of interest due to its intersection with corporate finance, investments, law, and economics. Seyhun noted its importance in pricing securities and understanding corporate governance: "In investments, it would be silly to make a stock buy-or-sell decision without knowing what insiders are doing." He likened his long-term engagement with insider trading research to Hotel California: "I checked in 45 years ago...I still find myself unable to leave."

Schipani emphasized her focus on corporate governance and fiduciary duties: "Executives that personally benefit from trading on insider information are violating those duties...Good corporate governance demands integrity." She remains intrigued by how insiders creatively exploit these opportunities despite longstanding rules against unethical behavior.

The forthcoming study will be published in the Harvard Business Law Review.