Bradford Lynch

Bradford Lynch, Daniel Taylor, Robert J. Jackson, Jr. Late Filings and Insider Trading: Broken Windows or Opportunism?.

Abstract: The Securities Act of 1934 requires corporate insiders to publicly disclose transactions in their company’s stock within two business days on Form 4. Despite this bright-line legal requirement, we identify more than 100,000 transactions, involving over $122 billion that were disclosed late. The conventional wisdom in the legal community is that these late filings are unintentional clerical errors and that it is a waste of resources to police these “broken windows.” Perhaps as a result of this, the SEC has rarely enforced the filing deadline. We examine the phenomenon of late Form 4 filings and associated lack of enforcement. In contrast to the conventional wisdom, we find that trades reported in late filings are highly opportunistic––they earn significant abnormal returns relative to trades in timely filings and appear intended to conceal trading activity prior to material corporate events. Our evidence suggests that insiders may be exploiting the SEC’s lack of enforcement of filing deadlines, resulting in unusually opportunistic insider trading.

Bradford Lynch, Price Improvement and Payment for Order Flow: Evidence from A Randomized Controlled Trial.

Abstract: There is ongoing debate as to whether the practice known as “payment for order flow” (PFOF) causes price improvement for retail investors. In this paper, I use a randomized controlled trial to attempt to answer this question and measure the extent of price improvement. The trial involves trading random stocks at random times across random brokers and comparing execution quality across direct market access and PFOF-based brokers. Consistent with the national best bid and offer (NBBO) not representing the prevailing market conditions, I find that trades executed via direct market access receive significant price improvement relative to the NBBO. Using direct market access trades as the counterfactual, I find that PFOF provides statistically and economically significant price improvement. However, I find considerable heterogeneity in the price improvement provided by PFOF: brokers deriving comparatively more revenue from PFOF (e.g., Robinhood) provide statistically and economically worse price improvement than brokers deriving comparatively less revenue from PFOF (e.g., TDA). My evidence is consistent with the existence of agency problems at specific brokers and suggests that zero commission retail trading is not without costs.

Bradford Lynch, Hidden Disclosure and the Market for Information.

Abstract: The public electronic dissemination of corporate filings is a cornerstone of modern capital markets. Yet, over the past three decades, the SEC has continued to accept certain filings on paper and not post them to EDGAR. Instead, they make these filings available to the public in the SEC Reading Room where a private data vendor digitizes the filings and sells them to institutional clients. This study examines the consequences of a change in SEC policy to begin publicly disclosing scanned images of paper filings. I find that disclosure of the scanned images serves important valuation and monitoring roles. Specifically, after the change in SEC policy I find a pronounced equity market reaction to the content of the paper filings, and an economically and statistically significant decline in rent extraction by insiders. My findings suggest that even when the cost of private information acquisition appears low, the private market for information is unable to replicate the effects of public dissemination. This is consistent with the notion that public electronic dissemination is a public good––the benefits of which cannot be replicated by the private market.

Bradford Lynch and Felix Nockher, Pricing Public Information: The Role of Trade.

Abstract: Using plausibly exogenous variation in the ability to short-sell, we provide evidence that public information is predominantly impounded into prices via trade. Studying the role of trade in the context of publicly-observed cash flow news, we find that only 6% of total price discovery is realized on announcement days with low trade. A portfolio strategy that focuses on stocks with high announcement-day trade yields monthly alpha of 2.46%. In contrast to the predictions of the literature on no-trade equilibria, our evidence suggests that trade plays a significant role in price discovery.

Bradford Lynch, Daniel Taylor, Robert J. Jackson, Jr. Holding Foreign Insiders Accountable.

Abstract: While corporate insiders at US-listed, US-domiciled companies must disclose their stock sales electronically within two business days on Form 4, the SEC has exempted insiders at US-listed, foreign-domiciled companies from this requirement (e.g., Astra Zeneca, Alibaba). Instead, these “foreign insiders” report their sales on a paper form mail-filed with the SEC. Using a unique dataset compiled from digitized versions of thousands of paper forms, we examine the stock sales of foreign insiders and compare their trading to that of their US-counterparts. Consistent with a lack of public scrutiny facilitating opportunism, we show that foreign insiders’ stock sales are highly opportunistic, and that opportunistic trading is concentrated in companies that are domiciled in non-extradition countries beyond the reach of US legal authorities: specifically, Russia and China. The average stock sale by foreign insiders affiliated with companies domiciled in these countries is over four times larger than that of US insiders and occurs prior to stock price declines of at least –18%. In our sample, we estimate that insiders at these companies have traded to avoid losses of over $9 billion. Collectively, we interpret our results as suggesting that corporate insiders associated with Chinese and Russian companies listed on US exchanges trade in a highly opportunistic and abusive manner; and that the SEC has unwittingly enabled such trading by exempting these insiders from Form 4 reporting requirements––preventing the market from scrutinizing and disciplining their trading behavior.

Bradford Lynch and Daniel Taylor, The Information Content of Corporate Websites.

Abstract: In 2008, the SEC published guidance allowing firms to use corporate websites as an alternative disclosure channel to EDGAR. While the information content and market reaction to traditional disclosure channels such as EDGAR filings and press releases are well-documented, evidence on corporate websites as a disclosure channel is scarce. In this paper, we shed light on corporate websites as an important but unregulated source of information to investors. We begin by developing a novel measure of corporate website content. We then identify large changes in corporate websites content that do not occur in close proximity to EDGAR filings and press releases and examine what effect, if any, these standalone changes in website content have on markets, and information production by analysts and journalists. Using standard event study methods, we find that standalone changes in the corporate websites provide significant value-relevant information to investors, reduce information asymmetry, and precede significant revisions in analyst forecasts and increases in media coverage. Collectively, our findings indicate that corporate websites are an economically significant source of new information to markets and information intermediaries that supplements traditional disclosure channels considered in prior literature.