Research suggests SEC visits can be a signal to insiders that could lead to a sell-off of stocks

Saving on costs: Companies typically fear the SEC (Securities and Exchange Commission) knocking on their door. After all, an unannounced visit from these watchdogs often spells serious trouble. But a new study suggests that some insiders may be informed of these visits—and cashing out their shares to avoid stock market losses.

A new study of stock market behavior led by professors at universities across the Midwest took a novel approach: The researchers used commercially available cellphone location data to track devices that spent significant amounts of time at the SEC offices. They then tracked those devices that arrived at corporate headquarters in the year before the Covid-related lockdowns.

They found that in 84% of the companies “visited” by the SEC’s roaming phones, executives had no idea of ​​any impending enforcement actions. Yet three months after those visits, the average stock price fell about 1.94% compared with the broader market.

The most striking finding, however, was that companies where insiders sold shares during these visits saw larger stock price declines, averaging 4.9% in the three months following the visit.

Now, to be clear, mobile tracking couldn’t distinguish between routine SEC investigators and the feared enforcement team that builds cases. The research also doesn’t directly point to insider trading—it just signals some surprising correlations. But the implications are interesting.

Overall, insider selling fell 16% in the two weeks surrounding the SEC’s secret visit. Drilling down, insiders were even more likely to hold onto their shares on “best behavior” after the visit in companies hit by enforcement actions. But in the smaller subset of companies where insiders were quick to divest during the visit, shares fell even more.

As for why stocks fell, researchers offer several theories. Marcus Painter, an assistant professor of finance at Saint Louis University and one of the study’s authors, told the Financial Times that the SEC visits could be a “distraction” for employees and management. Alternatively, rumors of the agency’s presence may have leaked out, prompting investors to sell.

In related news, the SEC blocked the use of third-party messaging and text messaging apps on employees’ work phones in April, in line with standards in the financial industry. The agency has levied $3 billion in fines against companies for failing to keep proper records of mobile communications.

As regulators tighten policy, a new study raises questions about whether companies can fully control the risks of insider trading.

Photo source: Santeri Liukkonen