The Impact of Mandatory Closed Periods on Corporate Insider Trading

The European Union’s Market Abuse Regulation (MAR), implemented in July 2016, introduced a uniform requirement for firms to impose a 30-day ‘closed period’ during which corporate insiders are prohibited from trading ahead of earnings announcements. This marked a significant departure from the previous regulatory landscape, where insider trading restrictions varied widely across member states. Our study investigates the effectiveness of this regulatory intervention and its broader implications for capital markets.

Why This Matters

Insider trading regulation is vital to ensuring fairness and transparency in financial markets. However, its design and enforcement differ across jurisdictions, reflecting a delicate balance between deterring opportunistic trading and preserving market efficiency. While voluntary trading restrictions, common in the US, offer flexibility, they lack consistency and may be less effective in curbing abuses. MAR’s mandatory closed periods present an opportunity to examine whether a harmonized regulatory approach can deliver the desired outcomes.

With regulators worldwide considering alternative policies, such as mandating disclosure of closed periods, our findings offer timely insights into the trade-offs of different approaches.

What We Do

We leverage MAR’s implementation as a natural experiment. Before MAR, 18 EU member states had no mandatory closed periods, while others mandated varying durations at least as strict as MAR. MAR’s uniform 30-day restriction thus created a ‘treated’ group (countries with looser pre-MAR policies) and a ‘control’ group (countries with equivalent or stricter pre-MAR policies). Importantly, both groups include major European stock markets, such as France and Germany for the treated group, and the UK—still in the EU at the time—for the control group.

Using a dataset covering 2012–2018, we analyze:

• Insider trading activity and profitability before and after MAR.
• Market liquidity and information asymmetry around earnings announcements.
• Changes in executive compensation and institutional ownership as broader economic consequences.

Our sample spans 20 EU countries and includes over 58,000 firm-month observations, with insider trading data sourced from Smart Insider, earnings announcement dates from Bloomberg, and financial data from Worldscope and Datastream. The 2012–2018 sample period allows us to compare variables of interest before and after MAR’s entry into force in July 2016, with the pre-MAR period incorporating two years before its 2014 adoption.

To identify firms in treated countries that voluntarily adopted closed periods, we employ two techniques:

1. Trading patterns: We classify firms without any trades during the 30-day window preceding earnings announcements before 2014 as voluntary adopters.
2. Annual reports: We search companies’ annual reports for keywords related to insider trading policies and classify those with hits as voluntary adopters.

Although these methods are not free from misclassification, they allow us to refine our analyses.

What We Find

1. Insider Trading Activity: MAR significantly reduces insider trading in treated countries during the 30-day pre-earnings window. This effect is strongest for firms that had not previously adopted voluntary restrictions. However, some trades still occur under exceptional circumstances, such as tax-related liquidity needs, though these trades are not profitable.
2. Insider Trading Profitability: Insider trading profitability decreases significantly post-MAR, suggesting the regulation effectively curbed opportunistic trading based on private information. However, pre-MAR trades were not profitable either, raising questions about the necessity of the mandate.
3. Executive Compensation Adjustments: Treated firms increase executives’ total and non-cash compensation, likely to offset the loss of implicit compensation from trading profits. This adjustment ensures no net wealth transfer from insiders to outsiders due to MAR.
4. Market Liquidity and Information Asymmetry: Paradoxically, the removal of insider trade disclosures during closed periods worsens the information environment. Treated firms experience increased bid-ask spreads and transaction costs. Two factors appear to explain this:
   • Insider trade disclosures, even ex post, serve as a valuable information source for markets.
   • Whereas voluntary adoption of closed periods is usually a signal of commitment to better governance and transparency, forced adopters with little incentive to prioritize market liquidity (such as those with concentrated ownership) do not take additional measures (such as voluntary disclosures) to address outsider owners’ liquidity and information needs.
5. Institutional Ownership: Contrary to MAR’s goal of enhancing market attractiveness, treated firms experience a decline in institutional ownership. This outcome aligns with the observed decrease in market liquidity and increased information asymmetry in firms with more concentrated ownership.
6. Role of Enforcement: Our main findings vary with cross-country differences in enforcement. Stricter pre-MAR enforcement correlates with reduced insider trading profitability, while stronger post-MAR enforcement exacerbates liquidity declines.

What This Means

Our findings challenge the assumption that a one-size-fits-all regulatory approach benefits capital markets. While MAR’s closed periods deterred informed trading, they introduced unintended consequences, including worsened liquidity and higher information asymmetry. These outcomes highlight the delicate trade-offs involved in securities regulation.

The study also highlights the importance of country-level enforcement and firm-level ownership. Uniform rules may not achieve their intended effects without addressing differences in enforcement rigor and firm-level incentives. Additionally, the observed adjustments in executive compensation suggest that firms adapt to regulatory constraints in ways that mitigate the intended redistribution of wealth from insiders to outsiders.

Implications for Policymakers

This research provides critical lessons for regulators globally. For the EU, it calls for a reevaluation of MAR’s effectiveness in achieving its harmonization and market-attractiveness goals. For other jurisdictions, including the US, the findings offer insights into the limitations of mandatory restrictions and the potential advantages of alternative approaches, such as mandating disclosure of voluntary closed periods.

Ultimately, effective insider trading regulation requires balancing uniformity with flexibility, tailoring rules to diverse market environments, and aligning incentives to promote both fairness and efficiency.

The authors’ full paper is available here.

Francois Brochet is a Professor of Accounting at Boston University.

Adriana Korczak is a Professor of Accounting and Finance at the School of Accounting and Finance - Business School, University of Bristol.

Piotr Korczak was a Reader in Finance at the School of Accounting and Finance - Business School, University of Bristol.

Patricia Naranjo is an Assistant Professor of Accounting at the University of Kentucky.