The Impact of the London Stock Exchange Model Code on Insider Trading in the UK

The London Stock Exchange Model Code (1977)imposes a two month close period prior to company earnings announcements where corporate insiders are banned from trading in their own company's securities. We find that although the close period affects the timing of insider trades surrounding both final and interim earnings announcements, it does not affect the performance or distribution of buy and sell trades. Insiders consistently earn abnormal returns irrespective of the pre and post earnings announcement period in which they trade. They tend to buy after abnormally bad earnings news and sell after abnormally good earnings news. We find systematic differences in trading patterns of insiders surrounding interim and final earnings announcements, which may be due to the different form and content of these two statements. It appears that many insiders have private information and exploit this in their trading activities. As a result, we conclude that restrictions as laid down by the Model Code do not impose significant opportunity costs on the trading of insiders. This has implications on the current debate on whether insider trading should be regulated