U-M business experts’ recommendations on ‘insider giving’ incorporated into new SEC rules

December 20, 2022
The Securities and Exchange Commission Headquarters Building in Washington, D.C. Image credit: us_sec, Flickr.com
The Securities and Exchange Commission Headquarters Building in Washington, D.C. Image credit: us_sec, Flickr.com

A new Securities and Exchange Commission rule related to reporting gifts of stock adopts recommendations by University of Michigan business professors and colleagues.

The SEC last week finalized its rule based on a proposal from the researchers that gifts should be reported in the same timely fashion as sales of stock by insiders—within two days. Previously, disclosure was required within 45 days after the end of the fiscal year.

The final rule cites the study published last year in the Duke Law Journal. Cindy Schipani and Nejat Seyhun, professors at U-M’s Ross School of Business, co-authored a study with Sureyya Burcu Avci of the Sabanci University School of Business and Andrew Verstein of the University of California, Los Angeles, School of Law.

Schipani says she and her collaborators are pleased that the SEC cited their research into insider giving—shareholders who donate stock to a charity and take a tax deduction before bad news sends the share price tumbling. In their study, they call the practice “worryingly widespread,” and far less likely to be detected or prosecuted than its better known kin, insider trading.

“It’s exciting to see the real-world application by the SEC of a proposal we made in our paper,” she said. “Timely reporting of stock gifts should go a long way toward preventing insiders from hiding gifts made on the basis of inside information and hopefully curb the abuse.”

Seyhun says timely reporting is important because “it disrupts and eliminates the ability of anyone from backdating their gifts.” Further, he adds, timely reporting of giving should alert both the receiver and the general investing public to the possibility that such an action was taken “in anticipation of future negative news developments.”

The researchers used a database of all gifts of common stock by large shareholders in all publicly listed U.S. firms from 1986 to 2020. The 9,000 actions represent about 2.1 billion shares with a value of $50 billion.

They found the donations “are suspiciously well-timed.” The stock prices rose about 6% during the year before the gift date and dropped about 4% during the year afterward. In other words, “Large shareholders tend to find the perfect day on which to give,” they write.