Do Proprietary Costs Deter Insider Trading?

Insider trading potentially reveals proprietary information, allowing rivals to compete more effectively against the firm. Using a variety of approaches to identify proprietary information risk, I find proprietary costs significantly deter insiders’ trading activities. The effect is more pronounced when insider trading is likely to be more informative to rivals. Examining the mechanisms, I find firms with higher proprietary costs are more likely to impose insider trading restrictions, and insiders’ trading decisions are more sensitive to proprietary costs when they have higher ownership of the company. Finally, when insiders trade despite higher proprietary costs, they earn significantly higher abnormal profits.