Law Department Management Blog
A research paper concludes that general counsel have a positive effect on controlling insider trading during so-called “blackout windows.” The paper, “The Impact of the General Counsel on Corporate Governance,” by Alan Jagolinzer, Daniel Taylor and Daniel Taylor and David Larcker (May 27, 2008), gathered insider trading policies of 260 US companies. For 80 percent of those companies, share trades by executive officers (referred to as Section 16 individuals) are prohibited during blackout windows. More precisely, without general counsel approval, officers may not buy or sell company stock for some number of days before and after an SEC filing, most commonly a quarterly earnings release. The aim is to prevent insider trading.
Even so, for various reasons, a fair amount of trading takes place during blackout periods. The authors calculated the profitability of insider trading within the blackout period and the effect on that profitability of required general-counsel signoffs: “[W]hen General Counsel approval is required, insider trades earn lower abnormal returns.” Hence, this study demonstrates that general counsel of a publicly traded corporation “can effectively limit the extent to which officers use their private information to extract rents from shareholders” [meaning, make money improperly on the stock market].
The authors also cite a paper by Kawk, B., B. Ro, and H. Suk in 2005: “The role of corporate in-house counsel and firms’ voluntary disclosure of forward-looking information: The case of management earnings forecast,” a Working Paper, Krannert Graduate School of Management, Purdue University. In a footnote, the authors say that the Krannert study “focus[es] on the compensation of legal counsel and show[s] that increased compensation is associated with more frequent management forecasts and more accurate forecasts.”