The effect of voluntary versus mandatory adoption of trading policies on the returns to insider trades

An insider trading policy is a critical aspect of a firm's internal governance which ensures the maintenance of corporate transparency. We examine the effect of trading policies on the returns to trades by corporate insiders over two periods: one where the adoption of a policy is voluntary and another where it is mandatory. In the former, we find that the requirement to notify the firm prior to trading does not result in lower trade returns on days outside the permitted trading windows. Where adoption of a policy is mandatory, trade returns made during the restricted windows are higher and the requirement to notify prior to trading significantly reduces these returns. The mandatory disclosure of a trading policy is effective in reducing returns from insider trading, suggesting improved investor confidence through greater transparency.