Insider share trading in
the United States gleaned almost $US2 billion ($NZ2.7
billion) in profits from the buying and selling of stock in
faltering debt-laden companies, according to a prize-winning
joint study undertaken by the University of Otago's School of
Business and the University of California.
The eight-year study, from 2000 to 2007, scrutinised stock
sales and buys before and after companies announced breaches
of banking covenants. It was led by Prof Paul Griffin, of
UC's Davis campus, working with Otago University's business
school's Dr David Lont and Kate McClune.
Dr Lont said while the study was solely looking at the US
markets, a recent New Zealand Securities Commission action
suggests debt covenant violations and subsequent waivers may
now fall under the New Zealand share market (NZX) continuous
However, if there is any doubt on this, the New Zealand
Securities Commission should review the rules to ensure the
adverse effects shown in the study are sufficiently covered.
"New Zealand could help avoid this [insider trading]
situation by requiring companies to reveal debt covenant
violations and waivers promptly to the market and impose a
blackout period for insider trading around debt
negotiations," Dr Lont said.
The study hinged on the sale of stock by insiders before
breaches of banking covenants were publicly disclosed, which
generally then saw the share price fall, partly as concerns
of bankruptcy took hold.
This was followed by the subsequent purchase of shares by
insiders after banks refinanced the company and the share
price recovered alongside the company's turnaround.
Prof Griffin tracked insider stock transactions around the
times when 1718 first-time disclosures of debt covenant
violations were made by US publicly-listed companies, between
2000 and 2007; before the October 2008 crash.
"The waiver of a debt covenant is an important step taken by
a lender to resolve a company's debt problems and help bring
the company back to financial health," Prof Griffin said in a
The study documented increased insider selling as stock
prices dropped, just before disclosure of violations, and
subsequent increased insider buying following the
disclosures, as stock prices recovered in response to the