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Mobile phone location data has linked site visits by US securities watchdogs to the headquarters of companies with measurable drops in their share prices — even when no enforcement action is taken.
When insiders sold shares right around a non-public visit by staff from the Securities and Exchange Commission, they avoided average losses of 4.9 per cent in the three months after the visit, according to a study led by researchers at four Midwestern universities.
By matching commercially available data with share price moves, the study offers a window into the secretive world of securities enforcement beyond publicly announced cases. It also raises questions about the rules around insider trading.
“Maybe we should be thinking about what the rules are when the SEC shows up,” said Marcus Painter, assistant professor of finance at Saint Louis University and one of the authors.
The research used geolocation data to identify mobile phones that spent significant amounts of time at the SEC’s various offices around the country. They then tracked those phones to corporate headquarters around the world in the 12-month period right before Covid-19 lockdowns led to extensive working from home.
The data did not distinguish between phones belonging to inspection staff, who make routine site visits and conduct “sweeps” that target areas of concern at multiple businesses, and the enforcement division, which builds cases against specific companies, Painter said. But 84 per cent of the visits were to groups that have never disclosed being under investigation.
The SEC declined to comment on the study.
Share prices across the board were 1.94 per cent lower than the broader market in the three months after the SEC visit. But the falls at companies where insiders sold stock right around the visit were significantly larger than those where they did not.
The data does not show why the share prices dropped, but Painter said the researchers have several hypotheses: the SEC visits may have distracted staff and management, or news of the visit may have leaked, leading investors to downgrade the stock.
The insider-selling data also highlighted an interesting contrast among companies. Overall, the researchers found that insiders were 16 per cent less likely to sell in the two weeks surrounding an SEC device visit, and the chilling effect was even stronger at groups where the visit was followed by an enforcement action. But companies where insiders did sell saw much larger share price drops.
“We are interpreting it as [most companies thinking] ‘the watchdogs are here, we had better be on our best behaviour’,” Painter said.