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Cancellable Insider Trading Plans: An Analysis of SEC Rule 10b5-1

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  • Stephen L Lenkey

Abstract

Rule 10b5-1 enables insiders to preplan future trades before becoming informed. Within a strategic rational expectations equilibrium framework, I characterize an insider’s unique optimal trading plan, which balances portfolio diversification against exploitation of the rule’s selective termination option. Because the rule reduces adverse selection and provides insurance against bad outcomes, the rule generally improves welfare for both the insider, who later becomes informed, and uninformed outsiders, provided there exists a sufficient degree of information asymmetry. Eliminating the rule’s selective termination option results in an even greater welfare improvement under a large subset of parametric conditions.Received March 9, 2018; editorial decision January 11, 2019 by Editor Wei Jiang.

Suggested Citation

  • Stephen L Lenkey, 2019. "Cancellable Insider Trading Plans: An Analysis of SEC Rule 10b5-1," The Review of Financial Studies, Society for Financial Studies, vol. 32(12), pages 4947-4996.
    • Handle: RePEc:oup:rfinst:v:32:y:2019:i:12:p:4947-4996.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhz035
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    Cited by:

    1. Lefebvre, Jérémie & Mazza, Paolo, 2023. "Advance disclosure of insider transactions: Empirical evidence from the Vietnamese stock market," International Review of Law and Economics, Elsevier, vol. 74(C).
    2. Hwang, Hae-shin & Jindapon, Paan, 2020. "Market making with convex quotes," Finance Research Letters, Elsevier, vol. 37(C).
    3. Batten, Jonathan A. & Lončarski, Igor & Szilagyi, Peter G., 2021. "Strategic insider trading in foreign exchange markets," Journal of Corporate Finance, Elsevier, vol. 69(C).
    4. Fich, Eliezer M. & Parrino, Robert & Tran, Anh L., 2023. "When and how are rule 10b5-1 plans used for insider stock sales?," Journal of Financial Economics, Elsevier, vol. 149(1), pages 1-26.

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