Do voluntary corporate restrictions on insider trading eliminate informed insider trading? ☆ Inmoo Lee a, ⁎, Michael Lemmon b,1 , Yan Li c,2 , John M. Sequeira d,3 a College of Business, Korea Advanced Institute of Science and Technology, 85 Hoegiro, Dongdaemun-gu, Seoul 130-722, Republic of Korea b Department of Finance, David Eccles School of Business, University of Utah, 1655 East Campus Center Drive, Salt Lake City, UT 84112-9301, USA c World Bank Group Singapore Office, World Bank, 10 Marina Boulevard, 018983, Singapore d Monetary Authority of Singapore, 10 Shenton Way, MAS Building, 079117, Singapore article info abstract Article history: Received 16 January 2014 Received in revised form 16 July 2014 Accepted 21 July 2014 Available online 25 July 2014 We investigate whether voluntary corporate restrictions on insider trading effectively prevent in- siders from exploiting their private information. Our results show that insiders of firms with seeming restrictions on insider trading continue to take advantage of positive private information while being more cautious when exploiting negative private information. The results suggest that insiders continue to exploit their informational advantages in a way that minimizes their legal risk. We also find that the degree of information asymmetry is significantly lower in firms with re- striction policies and that corporate governance significantly affects firms' decisions to adopt these policies. © 2014 Elsevier B.V. All rights reserved. JEL classifications: G30 G34 Keywords: Corporate governance Information asymmetry Insider trading Profitability of insider trading Voluntary corporate restrictions 1. Introduction Over the last twenty five years or so, there has been a series of changes in the regulatory environment regarding insider trading, 4 which has made firms pay closer attention to insider transactions. In particular, the Insider Trading and Securities Fraud Enforcement Act (ITSFEA) passed by Congress in 1988, and the Stock Enforcement Remedies and Penny Stock Reform Journal of Corporate Finance 29 (2014) 158–178 ☆ Earlier versions of this paper were circulated under the title “The effects of regulation on the volume, timing, and profitability of insider trading.” Most of the work was completed while Yan Li was at Korea University. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors and they do not represent the views of the World Bank or the Monetary Authority of Singapore. ⁎ Corresponding author at: KAIST Business School, Korea Advanced Institute of Science and Technology, 85 Hoegiro, Dongdaemun-gu, Seoul 130-722, Republic of Korea. Tel.: +82 2 958 3441. E-mail addresses: inmooL@kaist.ac.kr (I. Lee), michael.lemmon@business.utah.edu (M. Lemmon), yli11@worldbank.org (Y. Li), johnsequeira@mas.gov.sg (J.M. Sequeira). 1 Tel.: +1 801 581 7463. 2 Tel.: +65 81613202. 3 Tel.: +65 62299311. 4 Insiders are not allowed to trade based on material inside information according to Section 10(b) of the Securities Exchange Act of 1934. Nevertheless, many studies have documented that insider trading contains information regarding future stock returns (for example, Seyhun, 1986, 1992; Lin and Howe, 1990; Meulbroek, 1992; Rozeff and Zaman, 1998; Lakonishok and Lee, 2001). In early 2000, as a part of its final rules surrounding Regulation Fair Disclosure (FD) that changed both the timing and content of earnings information released by companies, the Securities and Exchange Commission reiterated the importance of insiders not trading based on material non-public information (for example, Bailey et al., 2003). In addition, the Sarbanes–Oxley Act which took effect in August 2002, also increased the scrutiny associated with insider trading by tightening the reporting requirements associated with insider transactions. http://dx.doi.org/10.1016/j.jcorpfin.2014.07.005 0929-1199/© 2014 Elsevier B.V. All rights reserved. Contents lists available at ScienceDirect Journal of Corporate Finance journal homepage: www.elsevier.com/locate/jcorpfin