Shiva Rajgopal

Who's monitoring the monitors? That's the question investigated by Shiva Rajgopal, Schaefer Chaired Professor of Accounting at Emory University's Goizueta Business School, and Roger White, a doctoral student in accounting at Georgia State University.

Rajgopal and White filed a Freedom of Information request to investigate the trading strategies of employees of the Securities and Exchange Commission (SEC). "After reviewing the buying and selling pattern of more than 7,000 trades in a two-year period, we found that SEC employees earned abnormally high returns on their portfolios," says Rajgopal.

"We considered three reasons for this: luck, skill of the traders, or access to non-public information," he says.

"Luck aside, if skills explained these results, we would expect to observe abnormal returns on both buys and sells," Rajgopal explains.

"Instead, we find that at least some of these SEC employee trading profits are information based, as employees tend to divest in the run-up to six SEC enforcement actions, thus profiting from the sale of stock before news of their investigation affects the market."

According to Rajgopal, "the SEC has responded that each of these trades was approved and that staff assigned to an inquiry are required to sell its holdings in the targeted firm. Because the very act of an inquiry can cause stock prices to fall, is this policy reasonable and should SEC employees even be allowed to hold individual stocks?"