Does Corporate Access Facilitate Informed Trading? Evidence from Trading in Advance of Internal Control Disclosures

We examine institutional investors' trading activity during the period preceding firms' annual disclosures regarding the effectiveness of internal controls over financial reporting (ICFR) required under Section 404(b) of the Sarbanes-Oxley Act (SOX). We find consistent evidence suggesting that some institutional investors (i.e., transient institutions with large overweighted positions) possess pre-announcement private information regarding forthcoming disclosures of material weakness in ICFR. In subsequent tests, we find that informed traders' pre-announcement private information varies with the suspected level of corporate access (i.e., access to firm managers via investor conferences) provided to investors by our sample firms. Collectively, our evidence suggests that corporate access plays a major role in institutional investors' development of pre-announcement private information in the post-Reg FD period