Insider trading, where shares are bought or sold on information not publicly available, is illegal but has traditionally been very difficult for regulators to prove. The lack of an obvious paper trail has often stymied investigators. Now a study from the Department of Accounting at Monash Business School reveals that an incentive program for whistleblowers can deter insider trading.
In the United States, the Dodd-Frank Wall Street Reform and Consumer Protection Act introduced a whistleblower bounty program. This program increased rewards for whistleblowers, while also lowering the risks of reporting illegal activity, to encourage more people to come forward.
Since it has been introduced to 2018, the whistleblower program has resulted in 28,000 tips and awarded $326 million to 59 individual whistleblowers.
Previous research showed the new law punishes wrongdoers more effectively and caused firms with allegations against them to reduce their potentially illegal behaviour. However, the impact on insider trading was unknown.
This study shows the whistleblower reduces the likelihood of insider trading occurring. It finds that after the introduction of the incentive program, the number of potentially information driven insider sales in market sensitive periods, such as the pre-earnings announcement window, reduces. Share sales before negatively perceived mergers or acquisition announcements also fell as did trading profits on purchases made...
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