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Earnings Black Out Period will Begin Soon but No One Really Knows When

I think it’s time to review the earnings blackout window as this lack of insider buying provides fuel for short sellers to attack the confidence of equity investors.  Not that they need much help with this as the inflation, interest rate, and beating war drums provide plenty of fuel to discourage investors.  I was encouraged to find this academic article which confirmed much of my bias, that there are no formal rules about these earnings blackout windows. Much of this article is inspired by the scholarly works of Wayne R. Guay (The Wharton School), Shawn Kim (The Wharton School), and David Tsui (USC), on Wednesday, June 2, 2021

At most publicly traded firms, insiders are prohibited from buying and selling stock during a period close to when they release quarterly earnings. For example, a common practice is a black-out period that begins 30 days before the quarter ends, the logic being that insiders are likely to have a good read on the financial results of the quarter. It ends shortly after the release, the same day or the following day.  This is called the black-out period. Generally, the typical trading window begins almost immediately to 2-3 trading days after the previous quarter’s earnings release and ends approximately 2-3 weeks prior to the end of the next fiscal quarter, resulting in an allowed trading window of about six weeks. The blackout period is the time insiders are not allowed to trade.

The glaring exception to this is the 10b5-1 rule which allows insiders to establish a trading window to buy or sell a predetermined amount of stock during a specified time period. 10B5-1 is a major loophole in the law that allows insiders to avoid these restrictions on buying and selling by filing these plans that allow them to ignore the prior rules.  The effort needed to file or withdraw these plans is minimal and the disclosure is opaque. I have spent countless hours examining these trades.  It would be very illuminating to see an analysis of 10b5-1 plans filed shortly before disappointing quarterly earnings. It’s my suspicion that 10b5-1 plans filed before disappointing earnings are far more common than those filed before positive earnings surprises.

Much of this article is inspired from the scholarly works of Wayne R. Guay (The Wharton School), Shawn Kim (The Wharton School), and David Tsui (USC), on Wednesday, June 2, 2021 

Although there is substantial variation in the length and timing of these trading windows, little is known about the factors boards consider when determining these constraints. Furthermore, in addition to these pre-specified trading windows and corresponding blackout periods, firms may impose event-specific trading restrictions on insiders (e.g., due to ongoing merger or acquisition negotiations). These “ad hoc blackout windows,” which are undisclosed to the public, are largely unexplored in prior literature according to the authors of the cited paper.

Why this is left to management discretion is an obvious foul.  Corporations should make it clear to the public when these windows open and close.  Why the SEC doesn’t require some standardization or disclosure here is also a mystery.

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