Who is regulating the regulators?

I just found a reference to this sensational new Working Paper – “Stock Picking Skills of SEC Employees” – by Shivaram Rajgopal and Roger M. White. This is the abstract:

“We use a new data set obtained via a Freedom of Information Act request to investigate the trading strategies of the employees of the Securities and Exchange Commission (SEC). We find that a hedge portfolio that goes long on SEC employees’ buys and short on SEC employees’ sells earns positive and economically significant abnormal returns of (i) about 4% per year for all securities in general; and (ii) about 8.5% in U.S. common stocks in particular. The abnormal returns stem not from the buys but from the sale of stock ahead of a decline in stock prices. We find that at least some of these SEC employee trading profits are information based, as they tend to divest (i) in the run-up to SEC enforcement actions; and (ii) in the interim period between a corporate insider’s paper-based filing of the sale of restricted stock with the SEC and the appearance of the electronic record of such sale online on EDGAR. These results raise questions about potential rent seeking activities of the regulator’s employees.”

What can I say – or rather what should I say other than WAUW!

PS You might want to listen to Elvis Costello’s “Watching The Detectives” (HT Dave O)

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  1. Inside regulator trading | Spontaneous Finance

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