Combating insider trading in the pharmaceutical industry : does FDA-mandated clinical trial disclosure provide a remedy?

Abstract

This paper examines the effect of mandatory clinical trial disclosures on the profits of insider trading, which is prevalent in the pharmaceutical industry. Using the implementation of the U.S. Food and Drug Administration Amendments Act (FDAAA) of 2007, which significantly increased the disclosure of clinical trials at Phase II or above, as an exogenous shock, I find a decrease in insider trading profits in affected firms. The cross-sectional analyses indicate that the effect is more pronounced for firms with higher uncertainty, poorer information environment, more detailed description of clinical trials, a higher degree of clinical trial completion, and an earlier submission of clinical trial results. Additionally, I find that the decrease in insider trading profits is concentrated among non-routine insider trades. These findings suggest that the increased disclosure under the FDAAA reduces the informational advantage of insiders and thus potentially constrains their profitable trading. My study highlights the importance of understanding the effectiveness of non-SEC disclosure regulations in deterring insider trading.