Description
Accounting research, whether founded in an economics or sociological paradigm, has generally
treated regulation as an exogenous part of the environment that shapes the behavior
of those who operate within it. Recently, joining those who have advanced the regulator
capture hypothesis, the exogenous presumption of the regulatory framework has been
challenged by institutional theorists within the sociology literature, and it has been reasoned
that those regulated seek to influence the regulations applied to them to gain advantage.
In effect, the actions of those regulated ‘‘endogenize’’ the regulations that gird them.
Employing this emerging strand of institutional theory research, we probe efforts to
‘‘endogenize’’ the Securities and Exchange Commission’s (SEC) regulation of insider trading.
More specifically, applying both latent and manifest content analyses, we examine
archival material relating to the development of insider trading regulations, focusing in
particular on the social negotiation of the SEC’s Rule 10b5-1, which prohibits company offi-
cers from trading in their company’s stock while in ‘‘knowing possession’’ of material, nonpublic
information. Our results suggest that those regulated by 10b5-1 effectively influenced
this regulation (viz., by way of successfully advocating for an affirmative defense
provided for so-called ‘‘planned trades’’). Our analysis suggests that endogenization is an
on-going, recursive process marked by moves and counter-moves among contending factions.
Implications are explored.
The social constitution of regulation: The endogenization of insider
trading laws
Zahn Bozanic
a
, Mark W. Dirsmith
b,?
, Steven Huddart
c
a
Fisher College of Business, The Ohio State University, 2100 Neil Avenue, Columbus, OH 43210, United States
b
Smeal College of Business and The Social Thought Program, Penn State University, 380 Business Building, University Park, PA 16802, United States
c
Smeal College of Business, Penn State University, 340 Business Building, University Park, PA 16802, United States
a b s t r a c t
Accounting research, whether founded in an economics or sociological paradigm, has gen-
erally treated regulation as an exogenous part of the environment that shapes the behavior
of those who operate within it. Recently, joining those who have advanced the regulator
capture hypothesis, the exogenous presumption of the regulatory framework has been
challenged by institutional theorists within the sociology literature, and it has been rea-
soned that those regulated seek to in?uence the regulations applied to them to gain advan-
tage. In effect, the actions of those regulated ‘‘endogenize’’ the regulations that gird them.
Employing this emerging strand of institutional theory research, we probe efforts to
‘‘endogenize’’ the Securities and Exchange Commission’s (SEC) regulation of insider trad-
ing. More speci?cally, applying both latent and manifest content analyses, we examine
archival material relating to the development of insider trading regulations, focusing in
particular on the social negotiation of the SEC’s Rule 10b5-1, which prohibits company of?-
cers from trading in their company’s stock while in ‘‘knowing possession’’ of material, non-
public information. Our results suggest that those regulated by 10b5-1 effectively in?u-
enced this regulation (viz., by way of successfully advocating for an af?rmative defense
provided for so-called ‘‘planned trades’’). Our analysis suggests that endogenization is an
on-going, recursive process marked by moves and counter-moves among contending fac-
tions. Implications are explored.
Ó 2012 Elsevier Ltd. All rights reserved.
Introduction
Trading based on privileged access to information can
demoralize investors and destabilize investment. It
has utterly no place in any fair-minded, law-abiding
economy. . . the American people see it, bluntly, as a
form of cheating. Let’s state it clearly, and in the
un-ambiguous terms that it deserves: Insider trading
is legally forbidden. It is morally wrong. And it is eco-
nomically dangerous (SEC Chair, Levitt, 1998).
Rule 10b5-1 addresses the issue of when insider trading
liability arises in connection with a trader’s ‘‘use’’ or
‘‘knowing possession’’ of material nonpublic informa-
tion. This rule provides that a person trades ‘‘on the
basis of’’ material nonpublic information when the per-
son purchases or sells securities while aware of the
information. However, the rule also sets forth several
af?rmative defenses, which we have modi?ed in
response to comments (Securities and Exchange Com-
mission, 2000a, p. 2).
A recent rule change [10b5-1] at the Securities and
Exchange Commission, authorizing prearranged sell-
offs of executives’ stock, gives added insulation to alle-
gations of insider trading and could provide former
Enron Chairman and Chief Executive Kenneth L. Lay
and other executives with a built-in defense. . .. Class
0361-3682/$ - see front matter Ó 2012 Elsevier Ltd. All rights reserved.http://dx.doi.org/10.1016/j.aos.2012.06.003
?
Corresponding author.
E-mail addresses: [email protected] (Z. Bozanic), [email protected] (M.W.
Dirsmith), [email protected] (S. Huddart).
Accounting, Organizations and Society 37 (2012) 461–481
Contents lists available at SciVerse ScienceDirect
Accounting, Organizations and Society
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action lawsuits against Enron maintain that Lay made
more than $100 million from stock sales before the
company’s value plummeted. (Los Angeles Times,
2002, p. A12; see also Wall Street Journal (WSJ),
2002a, 2002b, 2004, 2005, 2006).
Approximately $15 trillion is exchanged on organized
US stock markets annually. Not surprisingly, the trading
of stocks is a heavily regulated and institutionalized activ-
ity, with particular attention accorded to containing insider
trading in order to maintain a ‘‘level playing ?eld’’ among
investors (Levitt, 1998)—a position af?rmed by the U.S. Su-
preme Court in United States v. O’Hagan (1997; see Table 1
for synopsis), which states that the ‘‘animating purpose’’ of
federal securities laws is to ‘‘insure honest securities mar-
kets and thereby inspire investor con?dence.’’
Insider trading and its regulation have been dealt with
in the orthodox accounting, economics and ?nance litera-
tures as economic phenomena. Prior empirical insider
trading research has focused mostly on the extent to which
regulation is effective in removing insiders’ capacity to
pro?t from their information advantage, and also on how
insiders respond to changes in regulations. Prior evidence
on both issues has been mixed within the orthodox litera-
ture that has treated regulations as an exogenous force
shaping insider trading. For example, Givoly and Palmon
(1985) found a low incidence of insider trading in anticipa-
tion of impending public disclosures of news already
known by insiders. Park, Jang, and Loeb (1995) found that
insiders increased their trades several weeks prior to earn-
ings announcements, but refrained from trading in the per-
iod immediately preceding the announcement. Noe (1999)
found that insiders’ trades were made after, not before,
management earnings forecasts were issued. And, Hud-
dart, Ke and Shi (2007) reported that the distribution of
insiders’ trades within ?scal quarters and across ?rms indi-
cates that insiders pro?t from foreknowledge of soon-to-
be-public information about the ?rm, but avoid pro?table
trades when the risk associated with trading is high.
Regarding response to regulatory change, Gar?nkel
(1997), for example, found that, after the implementation
of the Insider Trading and Securities Fraud Enforcement
Act (ITSFEA) of 1988, insiders were more likely to postpone
trading driven by a desire to liquidate investments until
after negative earnings surprises were announced rather
thantrade strategically. Similarly, Seyhun(1992) found that
insiders were less likely to trade prior to company takeover
announcements, although the volume and pro?tability of
insider trading were rising over time, but failed to observe
any evidence of a decline in insider trading activity immedi-
ately following the passage of the Insider Trading Sanctions
Act (ITSA) of 1984, or the Insider Trading and Securities
Fraud Enforcement Act (ITSFEA) of 1988. Jeng, Metrick,
and Zeckhauser (2003) estimated that the pro?ts insiders
derived remains quite small. Jagolinzer (2009) examined
the strategic trade of insiders following the SEC’s enactment
Table 1
Insider trading cases identi?ed by government of?cials as prominent.
United States v. O’Hagan
A law ?rm partner was convicted of violating insider trading laws by a district court, but the Eighth Circuit Court reversed the convictions. The
Supreme Court overturned the Eighth Circuit Court, ?nding the convictions valid. The Court found that liability under 10b could be based on the
‘‘misappropriation theory,’’ a theory which ?nds liability on the basis of trading on nonpublic information by a corporate ‘‘outsider’’ in breach of a
duty owed to the source of the information, rather than the trading party. In this case, the law ?rm partner acquired the nonpublic information
when his ?rm had been retained by the client for representation of their con?dential tender offer. The Court also held that the SEC was within its
rule making ability when it enacted Rule 14eÀ3(a), which allowed liability to be established without a showing that the trading at issue entailed a
breach of a ?duciary duty. Rule 14eÀ3(a) requires disclosure or abstention from trading on nonpublic information, however acquired
United States v. Chiarella
This case was heard before the Supreme Court after a conviction by a jury and af?rmation of that conviction by the Second Circuit of a violation of 10b.
The alleged violator, an employee of a printer handling corporate takeover bids, was not a corporate insider. The Supreme Court held that his status
made the conviction improper, for he owed no ?duciary duties to disclose the information he possessed. The duty to disclose arises from (i) a
relationship which affords access to inside information, and (ii) the unfairness of allowing such trade without disclosure. The justices were divided
in their opinion, with ?ve justices offering opinions (majority, two concurrences, and two dissents). The majority consensus was on the lack of an
af?rmative duty for non-corporate insiders to disclose material non-public information
United States v. Teicher
Defendants appealed convictions for insider trading on two theories: evidence of bias was excluded and jury was improperly instructed on the
‘‘misappropriation theory.’’ This court af?rmed the convictions. With regard to ‘‘misappropriation theory,’’ the court determined the jury
instruction was harmless. This court suggested that mere possession of inside information would be enough to support a conviction and that
requiring a causal connection between the information and trade could frustrate attempts to distinguish legitimate and illegitimate trades. This
court’s test became known as the ‘‘knowing possession’’ test, although the court did not apply that standard to the facts of this case
United States (SEC) v. Adler
SEC brought action against stockholders and others for alleged insider trading. Stockholder had traded a large number of shares shortly after a call
received following a board meeting where non-public information was discovered that would result in a drop in the stock’s value. The lower court
granted summary judgment in favor of the stockholder on some counts, and sent the other counts to the jury. The jury could not reach a decision,
and a mistrial resulted. This court determined ?rst that the appropriate test for a violation was the ‘‘use test,’’ and that mere possession of non-
public information was not a violation per se. The use test left to the jury the determination of whether the non-public information was actually
used in the trades that are alleged to be violations. The case was then sent back for trial again with this new test as the governing rule
United States v. Smith
Following a conviction in the lower court, the defendant appealed. The Ninth Circuit Court af?rmed the conviction on the evidentiary issue as well as
on the substance of the alleged insider trading violation. With respect to the latter, the Court held that internal corporate earnings projections are
material inside information and proof of actual use is required to support a conviction. The Court addressed the Second Circuit’s Teicher opinion
and rejected its reasoning in favor of the reasoning of the Adler court in the Eleventh Circuit. The Court held that the SEC or other government
entity must demonstrate that the suspected inside trader actually used material nonpublic information in consummating his transaction.
462 Z. Bozanic et al. / Accounting, Organizations and Society 37 (2012) 461–481
of Rule 10b5-1 and found that insider plan initiations made
prior to adverse news events and plan terminations made
ahead of positive news events were associated with abnor-
mal returns. Finally, Brochet (2010) found that SOXreduced
the incentives for insiders to sell stock in advance of the
public release of negative information. Irrespective of
empirical evidence, allegations of improper and highly prof-
itable insider trading continue to receive broad publicity.
Such allegations and incidents raise public concern of wide-
spread and grave impropriety (see, for example, Wall Street
Journal, WSJ, 2010, 2012; London Evening Standard, 2010;
Telegraph, 2010). This voiced concern suggests a need to
more fully understand the complex social dynamics that
have been largely unexplored in existing research.
More speci?cally, none of the prior studies yielding
mixed empirical results on insider trading and its regula-
tion has applied a sociological perspective. Concerning
adherence to the single orthodox theoretical economics
perspective, Lowe, Puxty, and Laughlin (1983), for exam-
ple, advocated that alternative theoretical perspectives be
applied to understanding the complex dynamics of
accounting regulation and standards development, while
O’Leary (1985, p. 94) observed that ‘‘rapidity in scienti?c
progress would require a proliferation of competing theo-
ries and research programs being built side by side.’’ One
potential reason for the mixed results, which we explore
in this paper by applying institutional theory (e.g., Meyer
& Rowan, 1977), is that the regulation governing insider
trading may not be wholly exogenous. In other words, it
is possible that those who are to be regulated may seek
to in?uence emerging regulations so that the ultimate im-
pact of the rules is muted or subverted, thereby effectively
endogenizing regulatory regimes (Campbell, 2004, 2010;
DiMaggio & Powell, 1991; Edelman, Uggen, & Erlanger,
1999, 2011). We will, in turn, marshal evidence by apply-
ing both latent (qualitative) and manifest (quantitative)
content analyses in examining the endogenization process
(for discussion of incorporating both qualitative and quan-
titative methods in a single study, see Berg, 2004; Covales-
ki & Dirsmith, 1990; Downey & Ireland, 1979; Jick, 1979).
In the next section, we review institutional theory in
more detail, especially with respect to the issue of the
endogenization of regulations, concluding with the state-
ment of the central research question addressed in our
work. Next, we detail the latent and manifest content anal-
yses research methods we employ, as well as the archival
material we examine. The third section describes our qual-
itative assessment of the historical development and trans-
formation of insider trading regulations to render them
less stringent, as well as the quantitative analysis of letters
of comment submitted to the SEC pertaining to the 10b5-1
regulation of insider trading. The ?nal section explores
implications derived from our analysis.
Theoretical framework
Traditional views of in?uencing governmental regulations
Although it may now be seen as naïve, traditionally
authoritative rules have been viewed as concrete, determi-
native and able to coerce compliance on the part of those
regulated – a stance generally consistent with a legal the-
ory which posits that law is ‘‘autopoietic’’ and is inter-
preted as self-referential, autonomous and characterized
by an internal logic sealed off from social in?uence. This
stance is more generally seen as being part of the ‘‘materi-
alistic perspective’’ which ‘‘portrays organizations as ra-
tional wealth-maximizers, and sees the law as a system
of substantive incentives and penalties’’ (Edelman, Fuller,
& Mara-Drita, 2001, p. 892; Coglianese and Kagan, 2007).
It has, of course, long been recognized that those regu-
lated are able to in?uence the regulations that are intended
to curb their actions, with President Woodrow Wilson, for
example, opining in 1913 that ‘‘If the government is to tell
big business men how to run their business, then do not
you see that big business men have to get closer to the gov-
ernment even than they are now? Do not you see that they
must capture the government in order not to be restrained
too much by it? Must capture the government? They have
already captured it!’’ (Wilson, 1961). Consistent with Wil-
son’s observation, and also residing within the materialist
perspective, the theory of regulator capture has been pri-
marily developed in economics and advanced in a variety
of literatures (for early formulations, see Averch & Johnson,
1962; Bernstein, 1955; Stigler, 1971; for illustrative appli-
cation in accounting, see Richardson, 2009; Roberts & Kur-
tenbach, 1998). Here, a regulatory agency is said to be
‘‘captured’’ when it actually advocates for the interests of
those to be regulated, especially large commercial enter-
prises having much at stake and considerable resources
to wield in shaping policy outcomes they prefer, instead
of the agency acting in the public’s interest. This form of
in?uence is seen as very active and overt.
In turn, Wilson (1989, pp. 83–88) offered a seminal cri-
tique that a variety of societal changes had lessened the
threat of regulator capture by those regulated, including
the ability to communicate with diverse groups affected
by regulation, a dramatic redistribution of political re-
sources and a marked increase in press coverage of regula-
tory actions. Despite the veracity of such critiques, the
regulator capture thesis has persisted and even been spe-
ci?cally applied to the SEC (see, for example, Bloomberg
News, 2009; United States District Court for the District
of Columbia, 2008; New York Times, 2010; Taibbi, 2011).
Nevertheless, it has been held that regulatory capture, with
its more overt, direct acquisition of a regulator in which it
advocates for those regulated, may be overly simplistic. For
example, Davidoff (2010) reasoned that the in?uence of
those regulated may be much more subtle and indirect,
and involve an ‘‘ideological and social capture’’ of such reg-
ulators as the SEC. For example, those selected for leader-
ship positions often come from backgrounds sharing
worldviews with those regulated, speci?cally, a commit-
ment to free and open markets with a minimum of regula-
tion—termed a ‘‘neoliberal ideology’’ or simply interact
more with representatives from industries they regulate
(for discussion of the role of neoliberal ideology in
accounting regulation, see Cooper & Robson, 2006). With
such an ideological foundation and continuing dialog, the
thought patterns being brought to bear in formulating reg-
ulations are subtly in?uenced.
Z. Bozanic et al. / Accounting, Organizations and Society 37 (2012) 461–481 463
Economic sociologists having a link with institutional
theory have recently invoked the regulatory capture theme
in exploring the mortgage securitization crisis, with, for
example, Fligstein and Goldstein (2010, p. 31, 63, 64; see
also Lounsbury & Hirsch, 2010, p. 12) observing that a
‘‘type of passive regulatory capture’’ (although they left
‘‘type’’ unde?ned) existed in which bankers expressed
their wishes, largely in the form of espousing an ideology
of free, ef?cient markets in which regulators responded
with favorable regulations. More speci?cally, they con-
cluded that, ‘‘As the activities of banks expanded and they
invented more and more ?nancial products, bankers were
consistently able to convince regulators and the executive
and legislative branches of government to stay away from
regulating the market. Their basic arguments were that the
?nancial innovations in the market were producing robust
economic growth and that at their core these innovations
made a market that was able to control its own risks,’’ a
view shared by some in the accounting research commu-
nity (e.g., Benston, 1973). But, this concern for an unde-
?ned ‘‘type of regulatory capture’’ in which regulators
relinquished their duties, also suggests that this concept
may have lost its precision for guiding research.
Also broaching the topic of the ?nancial meltdown,
Campbell (2010) reasoned that market activity is always
in?uenced by political rules and regulations, but that
the neoliberal ideology favoring free and open markets
and minimizing regulation has dominated in the U.S. over
the last three decades; here, for example, such prominent
federal regulators as Alan Greenspan and Arthur Levitt
warned that regulation would undermine the ef?ciency
of the market and lead to distortions. Not surprisingly,
the National Bureau of Economic Research found that
U.S. ?nancial regulations dropped signi?cantly during this
time period under the guise of regulatory reform, includ-
ing those of the SEC (Wolf, 2009). Also touching upon the
pervasive effects of the free market ideology, Ruptsova
et al. (2010) reasoned that not only does government cre-
ate and shape markets, but also that the unfolding nature
of markets and their allied logics shape governmental
regulation. In turn, they theorized that the state is itself
endogenized in which its regulations are institutionally
in?uenced in terms of their development, form and con-
tent – the precise theme explored in more detail in the
next subsection. On this point, Ferraro, Pfeffer, and Sutton
(2005, p. 11) observed that ‘‘market-based exchanges are
considered to be the baseline and the natural and the
best option for organizing activity,’’ so much so that such
notions as ‘‘the market’’ are not just ideologies, but may
themselves have become institutionalized. Similarly,
exploring the political processes attendant to accounting
standards promulgation, Laughlin and Puxty (1983) rea-
soned that ideology, or in their terms, worldview, is so-
cially constituted for a given class of people who share
a common set of experiences that in time ‘‘crystallizes’’
into a value system or perspective in order to enable
them to come to terms with reality. This notion of world-
view enables researchers to partition people concerned
with ?nancial reporting into the class of users of ?nancial
information and the class of preparers of this information,
each with their own set of values, discourse and perspec-
tives which are brought to bear in seeking to debate and
in?uence proposed accounting standards, as opposed to
economic self interest which is more individually ori-
ented as is the regulator capture thesis. In turn, the ideol-
ogy or worldview of the user class, for example, is
enabling and restrictive in the sense that it does not just
serve to express its values, but also as a barrier for
accepting or even understanding the values of the pre-
parer class. Combining these literatures, it may be that
there exists a more general neo liberal ideology of market
based exchanges within which are found two classes of
worldview – users and preparers who support market
based exchanges, but who bring to bear differing values,
dialog and perspectives.
Perhaps the closest that the theoretical source of our in-
quiry, described in the next subsection, comes to broaching
the topic of regulatory capture has been termed the ‘‘old
institutionalism’’ (DiMaggio & Powell, 1991, pp. 11–15).
Here, Selznick (1949; see also 1957), for example, studied
the Tennessee Valley Authority whose purpose was to
serve the public by eliciting grass-roots involvement in
building dams and thereby prevent ?ooding, preserve for-
ested land, furnish assistance to primarily poor farmers,
generate electricity, and provide recreational opportunities
to the populace. However, Selznick found that the TVA was
overtly co-opted by powerful local and national interest
groups who strategically placed their representatives in
sensitive areas of the TVA to in?uence its policies, thereby
subverting the TVA’s overall mission and make money off
the program; in essence, Selznik found that the regulator
had become advocate of those to be regulated. Perrow
(1986, pp. 173–174, emphasis in original) offered an
appreciative critique of the old institutionalism that he
saw as a signi?cant failure of organizational theory in gen-
eral (ampli?ed by DiMaggio & Powell, 1991, pp. 11–15;
Meyer, 2008; and even by Selznick himself in 1996):
[T]he failure to see society as adaptive to organizations. A
view that organizations are protean in their ability to
shape society would direct us to the study of the pow-
erful organizations and to the public data gathered by
government agencies and congressional committees.
Here, we see the gravest defect of the [old] institutional
school in particular, for it has been the one most con-
cerned with the environment. That school’s view of orga-
nizations and society fails to connect the two. Parts of the
‘environment’ are seen as affecting organizations, but
the organization is not seen as de?ning, creating, and
shaping its environment.
As we shall see in the next subsection, empirically
establishing the connection between organizations and
society in their mutual constitution is precisely the focus
of more recent neo-institutional theory research concerned
with the processes of endogenization.
A neo-institutional theory perspective on the endogenization
of regulations
Institutional theorists have long recognized that such
higher levels of government as the federal government
are typically seen to be in positions of sovereign control
464 Z. Bozanic et al. / Accounting, Organizations and Society 37 (2012) 461–481
and exert coercive pressure on those regulated (Davis,
McAdam, Scott, & Zald, 2005; DiMaggio & Powell, 1983;
DiMaggio & Powell, 1991; Fligstein, 1991; Meyer & Rowan
1977; Vermeulen, Buch, & Greenwood, 2007). There is an
emerging body of research, however, that interprets insti-
tutionalization as an un?nished process that is profoundly
political in which those regulated play a prominent role in
in?uencing governmental regulations in order to shape
the ‘‘rules of the game’’ (DiMaggio, 1988; DiMaggio &
Powell, 1991; Powell, 1991; Scott, 2008; Suddaby, 2010).
On this theme, Oliver (1991) reasoned that one shortcom-
ing in institutional theory is its emphasis on conforming to
societal expectations. Instead, she proposed that organiza-
tional tactics may vary from conforming to resistant, from
passive to active, from preconscious to controlling, from
impotent to in?uential, and concluded that organizations
are likely to use more active tactics directed at modifying
the rules of the game in order to gain advantage when
institutional expectations are localized, weakly enforced
or ambiguous. As we shall see in the case of insider
trading regulations, however, these expectations were
expressed quite speci?cally (rather than ambiguously)
at the federal (rather than local) level, wherein a tighten-
ing and harmonization of enforcement was being
actively (rather than weakly) sought across all federal
jurisdictions.
Edelman (1990), Edelman (1992) and her colleagues
(Edelman et al., 2011; Edelman et al., 1999; Suchman &
Edelman, 1996; Edelman, Krieger, Eliason, Albiston, &
Mellema, 2011) saw as myopic the materialist perspec-
tive’s, as well as neo-institutional theory’s tendency to
treat regulation as ‘‘law on-the-books,’’ and as an ‘‘exoge-
nous’’ force, wherein authoritative rules are seen as con-
crete, determinative and able to coerce compliance on
the part of those regulated. Such a treatment ignores the
politics of ‘‘law in action,’’ wherein con?icting views over
the interpretation of regulations emerge (see also Louns-
bury & Rao, 2003), such that law takes form in and through
social interaction. Edelman et al. (1999, p. 407) suggested
that the meaning and force of laws and regulations may,
instead, be socially negotiated by regulators and those reg-
ulated, and offered a de?nition of rendering law as endog-
enous that is central to our work:
The construction of law is invariably contested: many
voices contribute to the process of legal enactment
and vie for favorable interpretations of law once it is
enacted. The more ambiguous and politically contested
the law, the more open it is to social construction. Law
regulating organizations is especially open to social
construction because corporate lobby is usually suc-
cessful in softening regulation that infringes on corpo-
rate interests, thus producing broad, vague mandates.
Under such conditions, organizations actively partici-
pate in constructing the meaning of compliance, and
this construction process generates ideologies of ratio-
nality [in our case, the neo liberal ideology of free and
open markets], which legitimate and reinforce particu-
lar compliance strategies. That organizations are both
responding to and constructing the law that regulates
them renders law ‘‘endogenous’’; the content and
meaning of law is determined within the social ?eld
that it is designed to regulate.
1
In contrast with the ‘‘materialist perspective’’ sketched
in the preceding subsection, Edelman and Suchman
(1997, pp. 479 and 497), reasoned that interpreting law
as endogenous rather than exogenous is generally consis-
tent with the ‘‘cultural perspective’’ which ‘‘portrays orga-
nizations as cultural rule followers and sees the law as a
system of moral principles, scripted roles and sacred sym-
bols.’’ Edelman et al. (2011, p. 891; see also Talesh, 2009)
observed that legal endogeneity theory does not contradict
the materialist perspective nor the regulatory capture per-
spective (e.g., Stigler, 1971) nor the older version of institu-
tional theory (e.g., Selznick, 1949), but ‘‘rather it extends
this work in that there is another, more subtle path
through which organizations in?uence law.’’ With Edel-
man and her colleagues’ work, as is true of our own study,
there is a shift of emphasis from this earlier literature to
probing covert as well as overt, and passive as well as ac-
tive in?uence attempts by classes of constituents con-
cerned with regulation in which focus is placed on the
role of ideology as opposed to the vested interests of indi-
viduals, and where an attempt is made to appreciate that
the institutional environment does indeed affect those reg-
ulated, and that those regulated have a role in de?ning, cre-
ating, and shaping that very environment (DiMaggio &
Powell, 1991, p. 11–15; Meyer, 2008; Selznick, 1996). Thus,
rather than seeking to eliminate theoretical perspectives,
our aim is on adding to the proliferation of theories that
may be usefully applied to unpack the complex dynamics
at play in shaping the regulatory milieu (see also Cooper
& Robson, 2006; O’Leary, 1985).
The research of Edelman and her colleagues proceeds by
probing the manner in which those regulated seek to in?u-
ence the laws and regulations that bind them after they
have been issued by seeking to in?uence legal de?nitions,
rhetoric, thinking, categories and logic used in court ver-
dicts over a span of time and in different locales, especially
if those regulations contain suf?cient ambiguity (see also
Edelman and Suchman, 1997; Lawrence & Suddaby,
2006; Suddaby, 2010). From this base, Edelman and Stry-
ker (2005, pp. 543–544) advocated probing the social
1
This de?nition contrasts with an orthodox, neo-classical economics-
based de?nition of endogenous. Based upon a Greek root of ‘‘proceeding
from within,’’ a concept is treated as endogenous if it is contained within a
model under investigation. More technically, within an econometric model,
a parameter or variable is said to be endogenous when there is a correlation
between it and an error term. Endogeneity can arise as a result of auto-
regression, measurement error, omitted variables, sample selection or
problems of simultaneity (c.f. Kennedy, 2008, p. 139). However, consistent
with orthodox treatments of regulation within the neo-institutional theory
perspective, albeit from a much different perspective, the accounting
literature has treated regulation of trade by insiders as an exogenous force.
Here, Huddart et al. (2007), for example, incorporate elements of the
regulatory framework as an exogenous constraint rather than as endoge-
nous. The focus of this work is on understanding the behavior of pro?t
maximizing agents who comply with a given set of regulations. Specifying
different rules in different economic contexts allows behavior and
outcomes to be compared across regulatory regimes; however, the roles
of agents in the process of moving from one regulatory regime to another,
or in the translation of regulatory requirements into rules of the economic
game, have not been modeled.
Z. Bozanic et al. / Accounting, Organizations and Society 37 (2012) 461–481 465
realms surrounding legal institutions to better understand
law as a broad set of formal rules, norms and symbols that
constitutes, and is constituted by, the economy in which
‘‘law is con?ictual, political, and deeply implicated in the
stabilization and transformation of power, including eco-
nomic power and control’’ (p. 534). Harmonious with the
criticism of the older version of institutional theory that
‘‘Parts of the ‘environment’ are seen as affecting organiza-
tions, but the organization is not seen as de?ning, creating,
and shaping its environment’’ (DiMaggio & Powell, 1991, p.
11), they theorized that:
While lawmay operate under some circumstances as an
exogenous shock to economic ?elds, law and legality
are more often both produced by and a product of eco-
nomic constructions. . . .Lawyers, judges, personnel pro-
fessionals, employers, and employees act as conduits of
institutionalized ideas, and as contestants in political
battles to shape the meaning of law in overlapping legal
and economic ?elds. It is therefore critical that eco-
nomic sociology treat law not as a force outside of the
socially embedded economy, but rather as a force
within, and a product of, that economy. Ordinarily, legal
and economic ?elds will be mutually endogenous,
through a reciprocal, causal dynamic that is, at once,
institutional and political. y incorporating a broader
notion of law as legality manifested in institutionalized
social ?elds overlapping with economic ?elds, we chal-
lenge the idea that economic rationality may be under-
stood apart from its law-related social construction (see
also Swedberg, 2005).
In a series of studies Edelman and her colleagues
(Edelman, 1990, 1992; Edelman, Erlanger, & Lande, 1993;
Edelman, Uggen, & Erlanger, 1999; Edelman et al., 2011)
found support for the general line of reasoning that the Ci-
vil Rights Act had become progressively in?uenced by
those regulated. But here, in Oliver’s (1991) terms, the
‘‘endogenization’’ of law was accomplished in a relatively
passive manner, as a broad class of social actors (e.g., HR
professionals) in effect negotiated the meaning of Equal
Employment Opportunity (EEO) after it had been enacted
(for related work, see also Dobbin & Sutton, 1998; Goodrick
& Salancik, 1996; Pedriana & Stryker, 1997; Sutton, 1996).
This line of research has been bolstered and updated by
Edelman et al. (2011), who found, in a content analysis of
the minutes of federal civil rights cases, that such organiza-
tional structures as grievance procedures, anti-harassment
policies, and formal hiring practices became symbolic indi-
cators of a defendant organization’s compliance with anti-
discrimination laws irrespective of their ef?cacy. A key in-
sight of this study was that the different courts developed
three distinctly different legal ‘‘theories’’ of discrimination
and corresponding forms of rhetoric in adjudicating the
cases before them: (1) disparate treatment theory, in
which employees were alleged to have been discriminated
against because of their membership in a protected class;
(2) disparate impact theory, in which a seemingly neutral
employment practice, like standardized testing, discrimi-
nates against a protected class; and (3) sexual harassment
theory, in which employees are sexually harassed by hier-
archical superiors or the organization exhibits a hostile
work environment for primarily women. Although these
three theories are not directly associated with our own re-
search focus, they suggest that insiders’ ‘‘knowing posses-
sion’’ vs. ‘‘use’’ vs. ‘‘possession providing a strong inference
of use’’ may be gainfully interpreted as distinctly different
legal theories or forms of rhetoric pertaining to regulating
insider trading that were differentially applied by courts
and wound their way into regulation (for further discus-
sion of the role of theorizing within institutionalization
processes, see Lawrence, 2006, pp. 226–227).
While Edelman (e.g., 2011, p. 893) focused on probing
‘‘the ways in which the legal rights of disenfranchised so-
cial groups are undermined by social processes’’, our work
probes the manner in which the legal rights of enfran-
chised and even super enfranchised social groups are ad-
vanced by regulatory processes. More subtly, perhaps,
while prior endogenization research examined how court
decisions were in?uenced from below by defendants who
symbolically display seemingly appropriate organizational
structures and processes, our work will in addition probe
efforts by the SEC to ‘‘harmonize’’ court decisions from
above to eliminate the ability to invoke the ‘‘use’’ as op-
posed to ‘‘possession’’ standard, and then proceeds to
examine how the SEC’s proposed insider regulation was
in?uenced from below as those regulated sought to loosen
its provisions. Moreover, while prior endogenization re-
search has focused on how in?uence is exerted relatively
passively on the interpretation of a regulation after it has
been issued, we will in addition study the active attempts
by those regulated to in?uence the codi?cation of a pro-
posed regulation before it is issued. On this point, Edelman
et al. (2011, p. 892) observed that ‘‘To the extent that the
laws that courts interpret are themselves subject to endog-
enous in?uences of corporate practices, legal endogeneity
may be even more powerful than what we document in
this article.’’ Moreover, whereas Edelman and her col-
leagues focused on how ambiguity in regulations may be
exploited by those regulated, we will build upon this key
insight to also probe how those regulated may actually
seek to also negotiate less ambiguity by advocating more
speci?city in regulatory provisions, thereby creating room
to maneuver within a regulatory framework. Our overall
focus is harmonious with Luke’s (2005, esp. ch. 1) ?rst
dimension of his three dimensional explanation of power
(we will consider his second and third dimensions in the
last section of our paper in which we explore the implica-
tions of our analysis). Within this dimension, power is
overtly exercised in which A exerts in?uence over B, such
as when open debate between the two on a policy issue
culminates in A’s interests prevailing. Concerning this ?rst
dimension of power, Cooper and Robson (2006, p. 426) ob-
served that accounting researchers ‘‘have gone too far in
neglecting to study the overt use of power in standard set-
ting,’’ although joined by Malsch and Gendron (2011, p.
458) and O’Leary (1985, pp. 89 and 93), they go onto urge
researchers to also consider more covert applications of
power such as framed by Luke’s second and third dimen-
sions; on this point, the older version of institutional the-
ory of Selznick (1949), with its emphasis of the overt
exercise of power, would be insensitive to these second
and third dimensions. Overall, extending the endogeniza-
466 Z. Bozanic et al. / Accounting, Organizations and Society 37 (2012) 461–481
tion line of reasoning in the manner we have outlined is
important because institutional theory research has
tended to problematize the formal distinction between
the regulation design period and the post regulation
enactment modi?cation period (DiMaggio & Powell,
1991; Scott, 2008; in counterpoint, Greenwood, Oliver,
Sahlin, & Suddaby, 2008, esp. 25–28, and Meyer, 2008
see this distinction as contentious and open to further re-
search scrutiny), such that exploring the former within
our study has the potential for further establishing the
robustness of the endogenization concept.
2
To date, there has been only limited application of neo-
institutional theory speci?cally to understanding the SEC
and ?nancial institutions. Bealing (1994) found in an
empirical study that a signi?cant portion of the SEC’s bud-
get was driven by the number and prominence of enforce-
ment actions it brought against regulatees, thus signaling
its conformity to Congressional expectations. Similarly,
Bealing, Dirsmith, and Fogarty (1996) examined the histor-
ical emergence of the SEC with the passage of the 1934
Securities and Exchange Act and found that this regulator
itself was subject to institutional pressures and had to seek
legitimacy in the eyes of not only Congress, but also regul-
atees in order to gain their support and survive. Hayward
and Boeker (1998) found that ?nancial analysts rate their
own clients’ securities more highly than wholly indepen-
dent analysts, but that this is mitigated by the professional
reputation of the analysts, which confers them power.
Westphal and Zajac found in two studies that the symbolic
display of actions bolstering corporate governance yielded
positive stock market reactions (1998), and that the sym-
bolic use of stock re-purchase programs by corporations
was mitigated by the power of the CEO over the board of
directors (2001). Lounsbury (2002) employed institutional
theory to examine the historical emergence of ?nance as a
professional ?eld. Meyer and Hollerer (2010) found that
the global spread of shareholder value is mitigated by na-
tional cultural and structural factors. Weber et al. (2009)
examined the in?uence of institutional pressures in the
formation of national stock exchanges in developing coun-
tries and found that international coercion, as well as
mimetic isomorphism (DiMaggio & Powell, 1983), in?u-
enced the properties of the resulting stock exchanges. Fi-
nally, Shapiro and Matson (2008) found that the public
accounting profession successfully resisted efforts by the
SEC to impose regulations pertaining to reporting on client
internal controls until the Enron and WorldCom debacles
and passage of the Sarbanes Oxley Act. These studies point
to the usefulness of neo-institutional theory to examining
issues related to the SEC and the stock market, but do
not broach the issue of endogenizing regulations, which
is the focus of our work.
In critiquing the accounting literature’s general use of
neo-institutional theory, and a more general neglect of
how rules may change over time within institutionalized
?elds, Lounsbury (2008, p. 356) observed that prior litera-
ture has tended to focus on micro processes of accounting
phenomena rather than broader institutional dynamics,
stating:
A more complete approach to practice that accounts for
institutional processes requires attention to the broader
cultural frameworks that are created by ?eld-level
actors, as well as the lower-level activities of organiza-
tions and other actors that articulate with those
frameworks. . . .[T]he power of a more comprehensive
approach becomes evident when probing the question
of where new practices come from – an important, yet
relatively unexplored question.
Consistent with Lounsbury’s position, we will direct our
research focus on examining the actions of both ‘‘lower le-
vel organizations and other actors’’ (the circuit courts and
those regulated) and a ‘‘?eld-level actor’’ (the SEC) as a
new insider trading regulation is developed.
Central research question
Our research addresses a single, overarching question:
What are the social dynamics by which those subject to
regulation seek to in?uence the institutional rules of the
game embedded in SEC insider trading regulations?
By addressing this central research question, our goal is
to provide descriptive evidence on the social dynamics by
which insider trading is in?uenced by those regulated. In
turn, the contribution to the endogenization thesis will
be established in our interpretation of the evidence
marshaled.
Research methods
We gathered evidence through latent and manifest con-
tent analyses of the archival material that punctuates the
history of insider trading regulation (Berg, 2004; for access
to rhetorical analyses within institutional theory, see Law-
rence, 2006, p. 239–240; Suddaby, 2010, p. 17). Archival
material subjected to latent content analysis took the form
of both public records (Denzin, 1978), as well as press cov-
erage of the events examined (e.g., Altheid, 1996; Gamson
& Modigliani, 1989; Kagan, 1994). Public material included
2
Extending Edelman et al.’s work, Kelly (2003) examined relatively
concrete tax law related to dependent care expense accounts and
employer-sponsored child care centers, and found that bene?ts consultants
apparently exploited ambiguity in the tax law through aggressive inter-
pretation. Similarly, Schneiberg and Soule (2005) examined fundamental
institutional change in the insurance industry between 1909 and 1930,
wherein those regulated themselves generated the conditions for change
through political action, thereby suggesting that regulation is a contested,
multi-level process. Vogel and Davis (2005) examined attempts by
shareholder activists (who opposed) and corporate managers (who sup-
ported) to in?uence state legislation designed to combat hostile takeovers
of corporations. They found that local economic crisis, existing state
infrastructure, and states’ prior anti-takeover statutes all conditioned
states’ rates of adopting legislation, the type of legislation adopted, and its
ef?cacy. Reversing this line of reasoning, Vermeulen, Buch, and Greenwood
(2007) found in a study of the Dutch concrete industry that a highly
institutionalized group of corporations and professional groups effectively
resisted innovations sought by their government, signaling that the power
of government to exert sovereign control may be exaggerated. We will
extend the work of Edelman and her colleagues, as well as Kelly, Schneiberg
and Soule, Vogel and Davis, and Vermeulen et al. by examining the overt
efforts of those regulated to ex ante in?uence the insider trading regulations
that are intended to constrain their actions.
Z. Bozanic et al. / Accounting, Organizations and Society 37 (2012) 461–481 467
U.S. Congressional legislation concerning the securities
markets (e.g., the Securities Act of 1933, the Securities Ex-
change Act of 1934, and the Insider Trading Sanctions Act
of 1984, and the Insider Trading and Securities Fraud
Enforcement Act of 1988) and corresponding SEC regula-
tions, particularly pertaining to insider trading, as well as
proposed new regulations and speeches by the SEC Chair,
the Chief Accountant, and the Commissioners. In particu-
lar, legal cases speci?cally identi?ed by the SEC as presag-
ing the need for recent insider trading regulation (see
Table 1) were subjected to detailed latent content analysis;
concerning this strategy, Tolbert (1992, p. 197) observed
that one manner in which limitations in general archival
analyses may be overcome within neo-institutional theory
is ‘‘through more in-depth historical analysis of a subset of
cases designed to supplement the analyses of the broader
patterns of change.’’ Press coverage included the Wall
Street Journal, Los Angeles Times, New York Times, etc., con-
cerning insider trading, political activity related to new
regulations issued during this era, and the resulting regula-
tions. Within latent content archival analysis, the research-
er serves as the primary research instrument (Altheid,
1996; Van Maanen, 1979, 1988; Strauss & Corbin, 1990).
According to Berg (2004, p. 107), such an analysis repre-
sents an ‘‘interpretive reading of the symbolismunderlying
the physically presented data,’’ and thus focuses on ‘‘the
deep structural meaning conveyed by the message.’’
Although there are dangers inherent in drawing inferences
from such symbolism, it is nevertheless a particularly po-
tent approach in examining archival material suggestive
of the expression of interest-based behavior (Merton,
1968, pp. 366–370). We mitigated these dangers by incor-
porating such independent, corroborative techniques as
using multiple sources, having researchers reach consen-
sus as to the interpretation of material, and including
detailed excerpts from the material examined to substanti-
ate the researchers’ interpretations (Berg, 2004). Also, the
use of manifest content analysis, described below, miti-
gates these dangers by incorporating a means for method-
ologically triangulating on the discourse pertaining to
insider trading regulation, thereby helping establish the
construct validity of our work (Campbell & Fiske, 1955;
in accounting, see Ashton, 1977).
Archival material subjected to manifest content analy-
sis included the letters of comment submitted to the SEC
pertaining to its proposed insider trading regulation (Rule
10b5-1, Regulation Selective Disclosure and Insider Trad-
ing, hereafter, SDIT); among these, in particular, we fo-
cused on examining the letters of comment that the SEC
self-reported as having in?uenced its deliberations, as
well as letters using similar key wording, but not cited
by the SEC as in?uential, and letters from credentialed ac-
tors. The manifest content analysis was performed using
the linguistic software package Linguistic Inquiry and
Word Count (LIWC; see Tausczik & Pennebaker, 2010, for
discussion of how LIWC was created and validated). LIWC
is word-count-based software that contains sets of lexica
known to be associated with emotional and cognitive pro-
cesses (‘‘attributes’’) embedded within speech. It matches
the words found within a given passage of text to those
associated with an attribute to provide the number of
attribute words (e.g., ‘‘positive’’ or ‘‘negative’’) as a fraction
of the total number of words found within a passage. We
examine the affective states revealed in the comment let-
ters across letter types, i.e., those letters cited by the SEC
in the ?nal rule, those containing certain keywords, and
by credential. LIWC is gaining prominence within the
scholarly accounting literature for analyzing text in a
number of areas, including ?nancial reporting (e.g., Li,
2008), forward looking statements (e.g., Li, 2010), and
conference calls (e.g., Larcker & Zakolyukina, 2012);
within ?nance, the ability of LIWC to tap negative and po-
sitive tonalities is consistent with, for example, Tetlock’s
(2007; see also Suddaby, 2010) more general ?nding that
the emotional content of analyst reports in?uenced the
trading of corporate shares. In addition to positive and
negative emotional attributes, and consistent with the
view that the response to institutional processes may be
emotional (e.g., Suddaby, 2010; Tetlock, 2007), we consid-
ered two additional forms of expressed negative states:
anxiety and anger. We then examined the affective states
revealed in the comment letters across letter types, i.e.,
those letters cited by the SEC as in?uencing the ?nal rule,
as well as letters containing key technical words (‘‘af?r-
mative defense,’’ ‘‘planned trade,’’ ‘‘safe harbor,’’ or ‘‘pos-
session vs. use’’), but were not cited by the SEC as
in?uencing its deliberations. Finally, we extend the pre-
ceding analysis to consider letters from credentialed
sources (e.g., associations, investment ?rms, law ?rms)
vs. non-credentialed sources to examine how the SEC
may have differentially responded to letters from in?uen-
tial actors. In order to examine the overall tone of the let-
ter, we create a summary measure, called net optimism
(see, for example, Bonsall, Bozanic, & Fischer, 2012; Henry,
2008; Rogers, Van Buskirk, & Zechman, 2011), which is de-
?ned as the number of positively emotive words less the
number of negatively emotive words, scaled by the total
number of words within a given comment letter. We rein-
force our manifest content analysis by providing excerpts
from comment letters possessing attribute levels at the
extremes to document the rhetorical strategies employed
in the letters that may have ultimately in?uenced the
SEC in its decision to provide insiders with a safe harbor
(Berg, 2004).
Prior research in accounting has, of course, subjected
correspondence submitted to such bodies as the FASB to
analysis via an applied economics perspective, unaided
by ethnographic content analysis packages directed at
teasing out more nuanced relationships, although none to
our knowledge have focused on letters submitted to the
SEC pertaining to the regulation of insider trading; more-
over, none have employed the endogenization strand of
institutional theory to motivate their examination. Con-
cerning this genre of research, Cooper and Robson (2006,
p. 424) observed that such a perspective is ‘‘. . . too re-
stricted in its conceptions of politics, too oriented to an
individualistic conception of society and politics, too
neglectful of the power of large organizations and groups,
and too partisan in its approach to deregulation,’’ and in-
stead recommended adoption of a ‘‘more constuctivist ap-
proach.’’ For example, advancing a positive theory of
accounting, Watts and Zimmerman (1978; for telling
468 Z. Bozanic et al. / Accounting, Organizations and Society 37 (2012) 461–481
critiques, see, for example, Lowe et al., 1983; Merino & Nei-
mark, 1982; O’Leary, 1985) examined company correspon-
dence submitted to the FASB concerning its discussion
memorandum on price level adjustments to ?nancial
statements. Generally theorizing that a company’s lobby-
ing position on a proposed accounting standard may be
predicted based upon its economic impact and manage-
ment’s economic motivations, they found that large ?rms
that experienced a reduction in net income under the pro-
posed standard favored the proposed standard, thereby
potentially averting increased governmental regulations,
while smaller companies opposed it if the cost of lobbying
was justi?ed by their increased bookkeeping costs. New-
man (1981) examined the relative in?uence of the SEC
on the organizational restructuring of various private sec-
tor boards (the APB and FASB) by constructing differing
‘‘power indices’’ and found that the SEC’s power increased
with each restructuring. Touching upon the regulator cap-
ture thesis (notably Stigler, 1971 discussed earlier), which
she termed the economics of regulation perspective, and
the agency theory perspective (esp. Watts & Zimmerman,
1978), Puro (1984) examined auditor lobbying behavior re-
lated to ?nancial reporting standards being developed by
the FASB in the form of examining comment letters sub-
mitted to the Board and classifying them as for, against
or neutral concerning a variety of Board exposure drafts.
She found that the regulator capture hypothesis better ex-
plained new forms of disclosure being required, while
agency theory better explained rules requiring standardi-
zation of accounting methods, suggesting that different is-
sues motivate systematically different behaviors on the
part of auditors. Kelly (1985) examined corporate manage-
ment’s decision to submit letters of comment to the FASB
concerning an exposure draft on foreign currency transac-
tions. She found that while the two primary variables
examined, debt covenants and management’s proportional
ownership, proved insigni?cant, companies submitting let-
ters opposing the standard were larger, had a greater
percentage of foreign sales and leverage, and, opposite of
what was hypothesized, lower management ownership.
McLeay, Ordelheide, and Young (2000), focused on the
transformation of the Fourth European Company Law
Directive into German accounting regulations, content
analyzed published commentaries of companies, auditors
and academics. They found that while industry lobby
groups representing reporting companies exerted the most
in?uence on resulting regulations, it was necessary for at
least one other lobby group to support its position in order
for it to exert a telling impact. Concerned with understand-
ing the general lack of participation by ?nancial statement
users in accounting standards promulgation processes,
Durocher, Fortin, and Cote (2007) sought to develop a
theory of user participation by blending a variety of theo-
retical perspectives to guide their interviews with two user
groups in Canada – ?nancial analysts and institutional
investors, to elicit their views of the standards setting
process. They found that participation and non-participa-
tion is driven by various forms of legitimacy attributed to
the standards setting process and intrinsic individual
motivation.
The endogenization of insider trading regulation
This section is organized into two subsections. The ?rst
presents the latent content analysis of historical events
surrounding the regulation of insider trading regulation.
The second presents the manifest content analysis of con-
temporary letters of comment submitted to the SEC per-
taining to a proposed updating of Rule 105b-1.
Re-negotiating insider trading regulations: historical origins
Insider trading was governed in the early 1900s primar-
ily through individual states’ corporate laws, and a number
of investigations isolated practices harmful to sharehold-
ers, including insider trading (e.g. U.S. Congress, 1913;
U.S. Congress House, 1900; Van Antwerp, 1913). The fed-
eral government became the dominant force within the
regulatory milieu after the stock market crash of 1929.
Subsequently, Congress passed the 1933 and 1934 Acts
to protect investors and assure the integrity of the securi-
ties markets (for discussion of stock markets and their reg-
ulation from a sociological perspective, see Stearns &
Mizruchi, 2005). The 1934 Act provides the foundation of
federal insider trade regulation by authorizing the Securi-
ties and Exchange Commission (SEC) to interpret federal
securities laws, amend existing rules governing securities
markets, propose new rules to address changing market
conditions, and enforce existing rules and laws (SEC,
2000b). However, the Act never actually made speci?ed
business activities illegal (i.e., it was not ‘‘self-executing,’’
nor was the term ‘‘insider’’ ever used; Bainbridge, 1999,
p. 25). Thus, the original 1934 Act had considerable ambi-
guity in its provisions. Moreover, March (1987, p. 154) ob-
served more generally that not only are such rule systems
marked by their ambiguity, but also con?ict of interests
among contending factions may become embedded in
their provisions such that ‘‘accounting standards are are-
nas of power and politics.’’ Indeed, in reviewing the rise
and impact of the 1933 and 1934 securities acts, Merino
and Neimark (1982, p. 34) observed that ‘‘We ?nd little
evidence to support the view that disclosure [coming
about as a result of the Acts] was expected to be useful
to individual investors, nor given its quality was it likely
to be useful in doing so. . .. The securities acts were not
so much acts of political enlightenment and reform, whose
primary purpose was to inform investors, but attempts to
maintain a status quo that has perpetuated the social unac-
countability of large corporations.’’
Rule 10b5 of the Securities and Exchange Act of 1934 is
the foundation of the current regulation, Rule 10b5-1,
which will be the focus of our analysis in the next subsec-
tion. Supreme Court Chief Justice William Rehnquist com-
mented in 1975, for example, that the pivotal Rule 10b5 is
‘‘a judicial oak which has grown from little more than a
legislative acorn’’ (Bainbridge, 2001, p. 12). Rule 10b5
makes it ‘‘unlawful for any person. . . to employ any device,
scheme, or arti?ce to defraud. . . or to engage in any act,
practice, or course of business which operates or would
operate as a fraud or deceit upon any person in connection
with the purchase or sale of any security’’ (SEC, 2000a). The
Z. Bozanic et al. / Accounting, Organizations and Society 37 (2012) 461–481 469
majority of legal claims against corporations and their
insiders fall within 10b5. Violations of the Securities Acts
can lead to either criminal liability (requiring the involve-
ment of the Department of Justice) or civil liability and
may arise from SEC actions or 10b5 class action law suits
initiated by third parties. The liability may apply to insid-
ers or the corporation under the ‘‘controlling person provi-
sion’’ (section 20 of the 1934 Act). Signi?cant case rulings
interpreting 10b5 did not appear until 1961, with case rul-
ings accelerating in the 1980s (Bainbridge, 2001, p. 12).
According to Karpoff, Lee, and Martin (2004), while the
SEC assessed $15.9 billion in ?nes against managers and
$8.4 billion against corporations from 1978 through
2002, the reputational penalties against these entities
may be as much as twelve times higher. Consequently,
the cost of not complying with the regulations is poten-
tially quite high.
De?nitions are crucial to the implementation of prohi-
bitions on insider trading: Which individuals and entities
are considered to be insiders? When is trading by an insi-
der improper? To answer the ?rst question, one class of
insiders, who are the focus of this study, are a company’s
of?cers. An answer to the second question remains elusive.
Three court rulings and Congressional acts have modi-
?ed the regulatory regime governing insider trading. In
United States v. Chiarella (1980; see Table 1 for synopsis;
for access to case law, see Westlaw, 2006), for example,
the Supreme Court ruled that insiders have the duty to
‘‘disclose material facts which are known to them by virtue
of their position, but which are not known to [the share-
holders] with whom they deal and which, if known, would
affect [the shareholders’] investment judgment. . . [or] to
forego [a purchase or sale] transaction.’’ Congress, in turn,
enacted the ITSA of 1984 to provide ‘‘increased sanctions
against insider trading in order to increase deterrence of
violations’’ (SEC, 2000b). ITSA allows the SEC to levy a civil
penalty up to three times the pro?ts gained or losses
avoided in transactions that are deemed illegal. The de?ni-
tion of insider trading, however, remained ambiguous. La-
ter, Congress passed the ITSFEA in 1988, which speci?es up
to 10 years imprisonment and increases criminal ?nes
from $100,000 to $1,000,000 for illegal trading activity.
Once more, insider trading escaped strict de?nition. Collec-
tively, these Congressional amendments to the original
1934 Act, however, endorsed SEC enforcement of federal
prohibitions of insider trading.
Beginning in 1998, and increasing in intensity through
2000, SEC Chairman Arthur Levitt stepped up efforts to
tighten regulations in the securities industry, as well as
?nancial reporting and auditing for publicly traded compa-
nies, in order to establish a ‘‘level playing ?eld’’ for inves-
tors (Levitt, 1998, 2000). According to the SEC (2000a),
the intent of the existing laws in 1998 was to enforce a
standard of ‘‘knowing possession’’ or ‘‘awareness’’ of inside
or private information: a company insider in possession of
information that is not publicly known and who trades
company stock is interpreted by the SEC as violating fed-
eral statutes. However, consistent with the thrust of Edel-
man et al.’s (1999) EEO study, the SEC (1999) observed in
its proposed rule on insider trading that ‘‘Neither we nor
Congress have expressly de?ned insider trading in a stat-
ute or rule. Instead, insider trading law has developed on
a case-by-case basis under the antifraud provisions of the
federal securities laws, primarily Section 10(b) of the Ex-
change Act and Rule 10b-5.’’ Although the Supreme Court
has variously described an insider’s violations as involving
trading ‘‘on’’ or ‘‘on the basis of’’ material nonpublic infor-
mation, the Court has not addressed whether ‘‘use’’ of such
information was necessary for trade to be improper, or
whether the lower standard of mere ‘‘possession’’ of such
information was suf?cient.
The SEC (1999, 2000a) stated that what precipitated its
proposal and ?nally adopted rule related to courts of ap-
peals’ cases that addressed the issue, but had reached
inconsistent results. The three speci?c courts of appeals’
cases cited by the SEC all recognized the practical dif?culty
of divorcing a trader’s ‘‘knowing possession,’’ or awareness
of inside information from its ‘‘use’’ in a trade (for discus-
sion of the exercise of regulatory discretion, see Spence,
1997). In United States v. Teicher (1993; see Table 1 for a
synopsis), the Second Circuit Court suggested that ‘‘know-
ing possession’’ was suf?cient to trigger liability for pre-
cisely this reason. In contrast, in SEC v. Adler (1998; see
Table 1), the Eleventh Circuit Court held that ‘‘use’’ was
the ultimate issue, but that proof of ‘‘possession’’ provides
a ‘‘strong inference’’ of ‘‘use’’ that suf?ces to establish a pri-
ma facie case. According to the Court,
The SEC argues that the district court erred as a matter
of law in granting summary judgment for Pegram in
[ÃÃ21] regard to his 1989 transactions in Comptronix
stock because, in concluding that Pegram’s preexisting
plan to sell stock rebutted any reasonable inference of
scienter created by the suspicious timing of his sales,
the district court improperly considered whether
Pegram used inside information in his trading. The
SEC argues that the district court incorrectly adopted
a causal connection standard for insider trading viola-
tions that allows a trader to avoid liability if the trader
proves that he did not purchase or sell securities
because of the material nonpublic information that
the trader knowingly possessed. The SEC argues that it
presented evidence that Pegram knowingly possessed
material nonpublic information, and thus Pegram, as a
corporate director, violated the prohibition against insi-
der trading found in § 10(b), Rule 10b-5, and § 17(a)
because, ‘‘whether or not Pegram used the inside infor-
mation,’’ Pegram traded in his company’s stock while in
possession of material nonpublic information.
Although it is fair to say that the Teicher court appeared
to look favorably [ÃÃ30] upon the SEC’s suggested test,
the court’s discussion was clearly dicta. The court
expressly found that it was ‘‘unnecessary to determine
whether proof of securities fraud requires a causal con-
nection.’’ Id. at 121. 25
In United States v. Smith (1998; see Table 1), the Ninth
Circuit Court rejected the Teicher ‘‘possession’’ test favored
by the SEC and instead, following precedent established in
SEC v. Adler, required that ‘‘use’’ must be proven in a crim-
inal case (for discussion of differing styles of enforcement
across courts, see Coglianese and Kagan, 2007, pp.
xvi–xx; May & Winter, 2007; Scholz & Wei, 2007).
470 Z. Bozanic et al. / Accounting, Organizations and Society 37 (2012) 461–481
Although few courts other than those cited above, have di-
rectly addressed the issue, a number of credible commen-
tators of the period expressed their views on the use vs.
possession debate, with the majority appearing to favor a
causal connection/use standard (CF. Horwich, 1997; Loss
& Seligman, 1989; Lowenfells & Bromberg, 1995).
Through con?icting circuit court verdicts, the ‘‘knowing
possession’’ standard favored by the SEC had been under-
mined. In direct response to the inconsistent application
of this standard in circuit courts and growing legal com-
mentary, the SEC sought to speci?cally tighten insider
trading regulations in order to establish less ambiguous
provisions (SEC, 2000a, pp. 22–23).
The SEC cannot, however, act unilaterally. Under the
federal Administrative Procedures Act, the SEC, like all fed-
eral regulators, is required to publish its proposals in the
Federal Register for notice and comment, with a required
comment response window of 90 days. Final rules are only
to be released after ‘‘due consideration’’ of the comments
received, and the ?nal rules usually detail some of the
SEC’s thoughts concerning the comments received—usu-
ally in footnotes to the ?nal release (for more general dis-
cussion of the effects of the Administrative Procedures Act,
see Coglianese, 2002; Croley, 2003; McCubbins, Noll, &
Weingast, 2007; Moe, 1990). In effect, the SEC is only re-
quired by law to open the possibility for being in?uenced
by regulatees.
On December 20, 1999, the SEC issued its proposed rule
on insider trading nested within the potentially more con-
troversial Selective Disclosure Rule to regulate disclosing
certain types of information to only narrowly de?ned
external constituents (perhaps to manage the comments
received, but also because some regulatees may have equa-
ted selective disclosure with insider trading; SEC, 2000a,
footnote 145). It may be anticipated that the response of
insiders to new regulations would be along two lines: (1)
insiders may seek reductions in the civil liabilities they
face when they trade company stock, or (2) insiders may
seek expansion of the circumstances in which they may
legally trade based on private information. In contrast with
Edelman and her colleagues’ work (e.g., Edelman, Uggen, &
Erlanger, 1999; Suchman & Edelman, 1996), that empha-
sized the role played by the ambiguity of a law, we will in-
stead interpret this second line of reasoning as seeking to
socially construct a more speci?c, albeit less stringent form
of regulation, by, for example, advocating ‘‘af?rmative
defenses’’ and ‘‘safe harbor’’ provisions within its
architecture.
Manifest content analysis of letters of comment:
contemporary dynamics
The SEC received several thousand comment letters on
the combined SDIT proposal (SEC, 2000a, p. 3). We ob-
tained the letters of comment, which are publicly available
for download from the SEC’s website, for our manifest con-
tent analysis. We employed the linguistic software package
Linguistic Inquiry and Word Count (LIWC) to conduct our
analysis. The results of the analysis can be found in Table 2.
In the ?rst two panels, four attributes are depicted: Posi-
tive, Negative, Anxiety and Anger. Panel A examines the
attributes across two categories, or letter types: those let-
ters cited by the SEC in its ?nal rule (Cited) and those non-
cited (Non-Cited). On the one hand, it may be the case that,
ex-ante, one would expect the SEC to only cite those letters
which were positive or supportive in their assessment of
the proposed rule. On the other, if the SEC was in?uenced
by parties contesting the rule and advocating, for example,
safe harbor provisions, the overall tone of the letters cited
may be negative. As depicted in Table 2, the results are
consistent with the latter expectation. On average, letters
cited appear to be less positive than those not cited, and
the difference is statistically signi?cant (À1.81, p-va-
lue = 0.00). Moreover, letters cited appear to be more neg-
ative than those not cited, with a statistically signi?cant
difference (0.39, p-value = 0.00).
In turn, the underlying Negative components—Anxiety
and Anger—appear to be the driving forces of negative let-
ters as both are more evident within letters cited by the
SEC. This ?nding is consistent with the SEC receiving and
citing letters not only contesting the proposed rule, but
also expressing duress as to the rule’s possible implications
for insiders and the protections it may or may not afford
them. In fact, as seen in excerpts from comment letters be-
low, substantial concern was voiced over possible in-
creased litigation risk stemming from application of the
broader ‘‘possession’’ standard and overly narrow de?ni-
tions of ‘‘safe harbor.’’
Panel B examines the attributes across two additional
letter types: those letters found to contain certain key
technical words (Keywords), noted above, and those which
do not (Non-Keywords). The results in Panel B are qualita-
tively similar to those in Panel A.
In Panel C, we bolster the preceding analysis by com-
paring credentialed (e.g., associations, investment ?rms,
law ?rms) sources to non-credentialed (i.e., individuals)
sources. Consistent with the endogenization hypothesis,
we ?nd that the credentialed letters cited by the SEC are
slightly less net optimistic than non-credentialed letters
(1.61 vs. 1.73). Turning to the letters not cited, we ?nd that
credentialed letters are again more pessimistic than non-
credentialed letters (1.68 vs. 3.88), and both types of cited
letters are more pessimistic than their non-cited counter-
part. Finally, and most importantly, inspecting the diago-
nals (Cited and Credentialed vs. Non-Cited and Non-
Credentialed), the difference is stark at À2.27 (p-va-
lue = 0.00), which provides further evidence in support of
the notion that the SEC chose to cite the more negative
(more pessimistic) letters received from credentialed
actors.
The last panel of Table 2, Panel D, presents the number
of comment letters by credential and tone. Letters are clas-
si?ed as possessing positive (negative) tone if they are
above (below) the sample median for net optimism.
Although the number of positive vs. negative letters (664
vs. 605) received from non-credentialed sources is similar,
the same cannot be said of positive vs. negative letters (4
vs. 63) received from credentialed actors. Building on Panel
C’s ?ndings, Panel D provides further evidence in support
of the endogenization hypothesis: while the vast majority
of letters are received from non-credentialed sources, let-
ters from credentialed actors are typically negative, and
Z. Bozanic et al. / Accounting, Organizations and Society 37 (2012) 461–481 471
these negative letters are the letters the SEC overwhelm-
ingly cites. As a percentage of the number of letters cited,
78% are from credentialed actors voicing a negative tone
on the SDIT proposal.
3
Next, we examined comment letters possessing attri-
bute levels at the extremes to ascertain the rhetorical strat-
egies employed. For example, what is being voiced in
letters cited (not cited) which exhibit high levels of posi-
tive or negative affect? Or, what is being voiced in letters
containing keywords (or lack keywords) with high levels
of positive or negative affect? First, for letters not cited,
as well as for letters not containing keywords, the com-
ments were generally from individuals and fairly sparse
in terms of the length of communication, regardless of pos-
sessing positive or negative affect. A comparison of letters
cited with those containing keywords revealed signi?cant
overlap: nearly 60% of letters containing keywords were
also letters found to have been cited. It begs the question,
then, as to why were there letters containing certain, stra-
tegic keywords not cited by the SEC? It may be that, in the
absence of these key technical words, the letters may have
been considered to possess little substantive content.
However, if possessing these key technical words, which
reference concepts critical to reducing insiders’ legal liabil-
ity, one might expect heightened SEC attention. Inspection
of non-cited, keyword letters revealed either letters were
submitted by individuals not stating explicit credible af?l-
iations (e.g., submitting on behalf of an association, law
?rm, or investment ?rm), or letters submitted from an
individual with a credible af?liation, though containing
content largely redundant with another letter cited. There-
fore, the ?nal comparison made is between letters cited
possessing high levels of positive or negative affect. Per-
haps ironically, positive letters supporting the proposed
regulation that were not cited by the SEC as having in?u-
enced its deliberations were submitted from small, indi-
vidual investors in support of SDIT as originally proposed
– the intended bene?ciaries of the regulation. At the other
end of the spectrum, negative letters were submitted from
associations and law ?rms explicitly or implicitly voicing
opposition to the proposal before it was amended to incor-
porate additional safe harbor and broader af?rmative de-
fense protections, in addition to advocating the stricter
‘‘use’’ standard. Thus, it appears that the SEC was more
responsive to those to be regulated by the new insider
trading regulation than those whom this regulation was in-
tended to protect from trading abuse.
Table 2
Manifest Content Analysis of Comment Letters Submitted to the SEC on the Selective Disclosure and Insider Trading (SDIT) Proposal. The mean percentage of
words (as a fraction of total word count) contained within SEC comment letters by attribute and comment letter type. The linguistic attributes, which are meant
to capture the affective states of the writer, are derived using wordlists from a common linguistic software package, LIWC. The attributes can be interpreted as
the mean number of pre-de?ned words contained in a comment letter as a percentage of the total number of words contained in the letter across letter types. In
Panel A, letter types are broken into those letters cited by the SEC in the Final Rule and those which are not. In Panel B, letter types are broken into those letters
containing keywords and those which do not. The keywords are de?ned as follows: ‘‘af?rmative defense,’’ ‘‘planned trade,’’ ‘‘safe harbor,’’ or ‘‘possession vs.
use.’’ In Panel C, we create a summary measure, called net optimism, which is de?ned as the mean percentage of positively emotive words less the number of
negatively emotive words (as a fraction of total word count). Here, letter types are divided into both those cited and non-cited and those considered to be from
credentialed sources (e.g., associations, investment ?rms, law ?rms). Lastly, Panel D presents the number of comment letters by credential and tone. Letters are
classi?ed as possessing positive (negative) tone if they are above (below) the sample median for net optimism. The number of letters cited by the SEC are
provided in parentheses.
Panel A: Comment letters cited by the SEC in the ?nal rule Panel B: Comment letters containing keywords
Attribute Letter type Attribute Letter type
Cited Non-cited Difference Keywords Non-keywords Difference
Positive emotion 2.63 4.44 À1.81
***
Positive Emotion 2.53 4.42 À1.90
***
Negative emotion 1.00 0.61 0.39
***
Negative Emotion 1.10 0.61 0.48
***
Anxiety 0.18 0.08 0.10
**
Anxiety 0.19 0.08 0.12
**
Anger 0.27 0.15 0.12
*
Anger 0.36 0.15 0.21
***
N 49 1287 N 36 1300
Panel C: Net optimism of comment letters Panel D: Count of comment letters
Letter type Letter type
Credentialed Non-
credentialed
Difference Credentialed Non-
Credentialed
Cited 1.61 1.73 À0.12
*
Positive
Letters
4 664
Non-Cited 1.68 3.88 À2.20
***
# Cited by
SEC
(2) (1)
Negative
Letters
63 605
Diagonal Difference (Cited and Credentialed vs. Non-Cited
and Non-Credentialed)
À2.27
***
# Cited by
SEC
(38) (8)
*
Represents statistical signi?cance at the 10% level.
**
Represents statistical signi?cance at the 5% level.
****
Represents statistical signi?cance at the 1% level.
3
The inferences we draw remain unchanged by the use of alternate
corpora for computing net optimism. Further, whether we assume the
variances across partitions to be equal or unequal (i.e., pooled or
Satterthwaite), the robustness of our statistical tests are unaffected.
472 Z. Bozanic et al. / Accounting, Organizations and Society 37 (2012) 461–481
Illustrative letters that exhibit an overall positive affect
include the following excerpts:
I hope that you will consider every protest from the
privileged elite as con?rmation of the necessity of Reg-
ulation FD. The privileged insiders will protest their lack
of special access to companies. The louder they com-
plain the more obvious that Regulation FD is a step for-
ward in improving the fairness and integrity of US
securities markets. (Stephen Jones, individual)
I have lost signi?cant amounts of money because I was
not privy to information that was given to ‘‘selected’’
parties before being publicly announced. (Malcolm Kir-
by, individual)
Illustrative letters that exhibit an overall negative af-
fect—anger and anxiety—include the following excerpts:
Our comments regarding proposed Rule 10b5-1 can be
summarized as follows: (1) the ‘‘af?rmative defenses’’
enumerated in Rule 10b5-1(c)(1)(i) should instead cre-
ate a rebuttable presumption under certain circum-
stances that the individual did not trade on the basis
of inside information. . .. (The Securities Litigation
Group of Brobeck, Phleger and Harrison LLP, law ?rm)
. . . The af?rmative defenses need to be broadened and
clari?ed in some respects to address additional situa-
tions where an investor should be permitted an oppor-
tunity to demonstrate that possession of inside
information was not a factor in his or her investment
decision. (The Securities Industry Association)
. . . Rule 10b5-1 is unnecessarily and impracticably
over-broad in proposing to make liability attach when
a trader is merely ‘‘aware of’’ material non-public infor-
mation, regardless of whether the information is used
or availed of in some manner, and in specifying only
four limited and incomplete af?rmative defenses to
the proposed general rule. In particular, we are con-
cerned that the introduction of a new standard of
‘‘awareness,’’ rather than ‘‘knowing possession’’ or
‘‘use,’’ as under the current case law, will create as
much, if not more, confusion and litigation as the Com-
mission is seeking to avoid by the proposed adoption of
Rule 10b5-1. We also believe that the proposed ‘‘af?r-
mative defenses,’’ in addition to being too narrowly
drafted, in some cases evidence unwarranted hostility
to normal, and undeniably innocent, business practices.
(The Association of the Bar of the City of New York)
We also believe that the Commission has not, in the
Proposing Release, made a persuasive case that the rule
it proposes is the most desirable of the possible alterna-
tives - including the alternatives adopted by the most
recent Court of Appeals decisions on this point. In par-
ticular, we believe the Commission has failed to explain
why its proposed rule of ‘‘awareness-plus-four-af?rma-
tive-defenses’’ is superior to the test adopted by the
Adler court, i.e., ‘‘’use’ with a strong inference of use
from ‘possession,’’’ which the Commission implicitly
rejects. We believe that the Commission would be bet-
ter advised either to adopt the Adler formulation or to
let the case law develop further in this area before
attempting to codify the law by rule-making, especially
where the Commission’s authority to do so may be
regarded as questionable and where the signi?cance
of the bene?t sought to be attained by the rule - clarify-
ing an ‘‘unsettled issue in [the law of] insider trading’’ –
is itself uncertain. (The Association of the Bar of the City
of New York)
After considering the letters of comment, the SEC re-
leased Rule 10b5-1, Selective Disclosure and Insider Trad-
ing, effective October 23, 2000. The Rule speci?cally
made trading while in possession of material nonpublic
information illegal across all jurisdictions. The ?nal rule,
however, was less stringent than the original proposal,
although it remained ?rm on the basic issue of ‘‘posses-
sion’’ vs. ‘‘use:’’
As discussed more fully in the Proposing Release, in our
view, the goals of insider trading prohibitions—protect-
ing investors and the integrity of securities markets—
are best accomplished by a standard closer to the
‘‘knowing possession’’ standard than to the ‘‘use’’ stan-
dard. At the same time, we recognize that an absolute
standard based on knowing possession, or awareness,
could be overbroad in some respects. The new rule
attempts to balance these considerations by means of
a general rule based on ‘‘awareness’’ of the material
nonpublic information, with several carefully enumer-
ated af?rmative defenses. This approach will better
enable insiders and issuers to conduct themselves in
accordance with the law.
While many of the commenters on Rule 10b5-1 sup-
ported our goals of providing greater clarity in the area
of insider trading law, some suggested alternative
approaches to achieving these goals. In that regard, a
common comment was that the rule should not rely
on exclusive af?rmative defenses. Commenters sug-
gested that we should either re-designate the af?rma-
tive defenses as non-exclusive safe harbors or add a
catch-all defense to allow a defendant to show that he
or she did not use the information.
We believe the approach we proposed is appropriate. In
our view, adding a catch-all defense or re-designating
the af?rmative defenses as non-exclusive safe harbors-
would effectively negate the clarity and certainty that
the rule attempts to provide. Because we believe that
an awareness standard better serves the goals of insider
trading law, the rule as adopted employs an awareness
standard with carefully enumerated af?rmative
defenses. As discussed below, however, we have some-
what modi?ed these defenses in response to comments
that they were too narrow or rigid, and that additional
ones were necessary. (SEC, 2000a)
The SEC speci?cally stated in its ?nal rule that it had in-
deed been in?uenced by the comments received from
regulatees:
The proposed af?rmative defenses generated a substan-
tial number of comments. Some commenters suggested
that the af?rmative defenses in the Proposing Release
were too restrictive, or that additional defenses were
needed to protect various common trading mecha-
nisms, such as issuer repurchase programs and
Z. Bozanic et al. / Accounting, Organizations and Society 37 (2012) 461–481 473
employee bene?t plans. Some of these commenters
noted that the requirement that a trader specify prices,
amounts, and dates of purchases or sales pursuant to
binding contracts, instructions, or written plans left
some common, legitimate trading mechanisms outside
the protection of the proposed af?rmative defenses.
Additionally, some commenters questioned the Propos-
ing Release’s exclusion of a price limit from the de?ni-
tion of a speci?ed ‘‘price.’’
In consideration of these comments, we are revising the
af?rmative defense that allows purchases and sales
pursuant to contracts, instructions, and plans. The
revised language responds to commenters’ concerns
by providing appropriate ?exibility to persons who
wish to structure securities trading plans and strategies
when they are not aware of material nonpublic infor-
mation, and do not exercise any in?uence over the
transaction once they do become aware of such infor-
mation. (SEC, 2000a, emphasis added).
As revealed in the footnotes to Rule 10b5-1, and corrob-
orated by our manifest content analysis depicted in Table 2,
the two groups whose comments the SEC most closely at-
tended to were apparently connected to the legal profes-
sion (e.g., bar associations) and the securities and
investment industry. These groups are generally seen to
have interests that align with those of corporate executives
(e.g., investment houses make money off executive trades)
so they may be expected to support corporate executives’
objectives (Bainbridge, 2001; Mizruchi, 1992). Consistent
with Oliver (1991; see also Friedland & Alford, 1991; Scott,
2008; Stryker, 2000), regulatees had effectively in?uenced
insider trading regulations by re-de?ning trades which are
permissible, thereby inducing more ‘‘play’’ in 10b5-1 pro-
visions via the creation of ‘‘af?rmative defenses’’ (see also
Kelson & Allen, 2004; Yackee, 2006). They were also able
to broaden the set of contracts that fell within the ambit
of the af?rmative defenses by convincing the SEC to broad-
en the de?nition of a ‘‘planned trade.’’ Even more play
would have been introduced had the defenses been made
non-exclusive, but the regulatees were not successful on
this front (see Burstein and Linton, 2002 for a general
discussion).
In sum, the revised Rule 10b5-1 provides an af?rmative
defense against litigation, or ‘‘safe harbor,’’ to insiders who
preplan trades at a time when they purport to not possess
material nonpublic information. This safe harbor does not
prevent a party from initiating a lawsuit against insiders,
but it does provide insiders a defense ‘‘which, if found to
be credible, will negate criminal or civil liability, even if
it is proven that the defendant committed the alleged acts’’
(SEC, 2000a). To qualify for the af?rmative defense, insid-
ers must: (1) enter into an irrevocable and explicit contract
to purchase or sell ?rm securities; (2) transfer trade execu-
tion authority to an uninformed third party (for example, a
broker); or (3) provide an uninformed broker an explicit
written algorithm for trade execution (this defense tends
to dominate in practice). Moreover, the Rule expressly pro-
hibits insiders’ from subsequently in?uencing the execu-
tion of planned trades. Insiders may selectively terminate
their plans before they are scheduled to expire or selec-
tively execute additional trades outside of their plans;
however, these acts may not enjoy the Rule’s legal
protection.
4,5
Implications
Consistent with an emerging body of institutional the-
ory research (e.g., Edelman et al., 1999; 2011; Edelman
and Suchman, 1997; Edelman & Stryker, 2005; Oliver,
1991; Scott, 2008; Suddaby, 2010), and in answer to our
central research question, our qualitative and quantitative
descriptive evidence suggests that various provisions with-
in the SEC’s insider trading regulations were effectively
and iteratively in?uenced by those regulated in multiple
waves. By implication, Rule 10b5-1 effectively became
endogenized. Although it was authorized by the 1934
Securities and Exchange Act to interpret federal securities
laws, amend existing rules governing securities markets,
propose new rules to address changing market conditions,
and enforce existing rules and laws (SEC, 2000a), the Act it-
self was not ‘‘self-executing,’’ and it never made such busi-
ness activities as insider trading speci?cally illegal
(Bainbridge, 1999, p. 25). As revealed in our latent content
analysis of cases speci?cally identi?ed by the SEC in moti-
vating it to propose a new regulation (see Table 1), the
4
Efforts to increase the ‘‘play’’ within 10b5-1 provisions did not subside
with the new rule’s issuance, however, since the act of entering into
planned trades may not be transparent, given that the SEC allows
companies to choose who participates within the 10b-5 planned trades,
and whether participation is disclosed. In most companies, the board of
directors chooses whether to amend insider trade policy to allow 10b5-1
trading; in such situations, companies generally delegate the decision of
whether to trade within 10b5-1 to the insider. The strategy of including
footnotes to the related Form 4 ?lings to the effect that trades are made
pursuant to 10b5-1 plans, but not disclosing the speci?c algorithm that
governs trades, has been sagaciously recommended by some lawyers
because it complicates the plaintiff’s task in ?ling a 10b5 class action
(Jagolinzer, 2009). In response, the SEC proposed in April 2002 mandating
disclosure on Form 8-K of insiders’ enrollment in 10b5-1 trading plans, and
also considered mandating disclosure of 10b5-1 participation for trades
that are executed pursuant to these plans (SEC, 2002). These more stringent
proposals, however, have been tabled inde?nitely. Some companies,
however, have chosen to voluntarily disclose participation in 10b5-1
trading programs.
5
Cooper and Robson (2006, pp. 427–428) observed that it is indeed a
heroic assumption that regulations effectively constrain management
action, that it is necessary to probe the constitutive roles of implementation
and interpretation. Although beyond the scope of the current paper, an
empirical investigation we conducted provided evidence in support of the
argument that insiders may be securing the legal protection of safe harbor
through invoking af?rmative defenses provided by planned trades in order
to circumvent the spirit of the Rule and thereby generate abnormal pro?ts.
Our empirical ?ndings reveal a signi?cant increase in insider stock sales
after Rule 10b5-1 became effective, i.e., insiders who invoke Rule 10b5-1
sell more stock and sell more often than they did before the rule became
effective. Further, we found that 10b5-1 participants executed a dispro-
portionate fraction of their sales in advance of bad news relative to non-
participants. The latter ?nding is consistent with the interpretation that
Rule 10b5-1 effectively relaxed trade constraints driven by perceived
litigation risk before ?rms’ news releases and that some insiders took
advantage of this condition (interested readers may contact the ?rst author
for more detailed discussion of our empirical ?ndings). These results tend
to support Merino and Neimark’s (1982) position that the 1933 and 1934
securities acts, and in our case the amended 10b5-1 provision, tend to
maintain the status quo in that the market model is reaf?rmed without
effecting substantive regulatory change.
474 Z. Bozanic et al. / Accounting, Organizations and Society 37 (2012) 461–481
federal circuit courts differentially applied what seemed at
the time ambiguous standards to gauge insider trading,
yielding inconsistent verdicts. On this theme, Scott
(2008; see also Friedland & Alford, 1991; Goodrick & Sala-
ncik, 1996) reasoned, for example, that social actors seek to
exploit inherent defects in the logic of regulations and re-
direct key de?nitions to serve their own interests. Consis-
tent with Edelman et al.’s (1999, p. 427, 2011) position that
laws may not serve as ‘‘articulate mandates,’’ applicable
provisions were differentially interpreted after they were
issued in case law across various circuit courts which dif-
fered in key de?nitions applied: from the ‘‘possession’’
standard favored by the SEC (United States v. Teicher,
1993); to a hybrid de?nition indicating that an actual
‘‘use’’ standard favorable to defendants was the ultimate
standard, but that ‘‘possession’’ provides strong inference
of improper insider trading (SEC v. Adler, 1998); to a
straight ‘‘use’’ standard (United States v. Smith, 1998;
SEC, 1999, 2000a). By implication, consistent with the
endogenization thesis, this ambiguity in key provisions in
existing regulations related to insider trading made it pos-
sible for alleged miscreants to escape prosecution in some
courts despite the SEC’s stated position that the ‘‘in know-
ing possession’’ standard should be enforced (SEC, 2000a,
p. 23).
The SEC, in turn, apparently recognized that its regula-
tory intent of enforcing a ‘‘knowing possession’’ standard
was being undermined (SEC, 1999, 2000a) and its goal of
fostering a ‘‘level playing ?eld’’ (Levitt, 1998) thwarted;
by implication, it recognized that existing regulations were
being endogenized. In an effort to harmonize standards ap-
plied across courts, improve their ‘‘clarity and certainty’’
(2000a, p. 25), and increase the stringency of provisions
applied, the SEC proceeded to further delineate the ‘‘in
knowing possession’’ standard within a proposed amend-
ment to Section 10b5 of the 1934 Act to be applied across
all jurisdictions, making it illegal for insiders to trade stock
if they merely knew of sensitive information (SEC, 1999).
Consistent with the Administrative Procedures Act, the
SEC received several thousand letters of comment on the
combined SEC (1999) that we subjected to manifest con-
tent analysis. By so doing, we were able to respond to Edel-
man et al.’s (2011, p. 892) observation that the laws
interpreted by courts may themselves be in?uenced by
those regulated, and that this dynamic may be a powerful,
albeit unexamined form of endogenization.
In particular, we focused on examining letters categor-
ically cited by the SEC as having in?uenced its delibera-
tions – those outright opposed the possession standard in
favor of the use standard (see Table 2, Panel A, ‘‘Cited Let-
ters;’’ SEC, 2000a; see Yackee, 2006, for discussion of
emphasizing such communications). We also examined
those letters broaching similar themes but not cited by
the SEC as in?uencing its decision, as well as letters not ci-
ted and not broaching these themes (Panels B–D). Concern-
ing the authors of the former letters primarily submitted
by the broad class of what Laughlin and Puxty (1983) label
as ‘‘information preparers,’’ during the period in which the
SEC sought to counter efforts to in?uence its regulatory in-
tent with respect to applying the ‘‘knowing possession’’
standard, and extending prior work by Edelman and her
colleagues (1999, 2011), we see in?uence attempts exerted
by regulatees before the regulation was ?nalized to allow
them more room to maneuver and escape prosecution for
improper behavior by in?uencing the key de?nition of ‘‘in-
sider trading’’ (Scott, 2008; Stryker, 2000). In additional
analyses (Panel C), we also found that the letters submitted
by credentialed parties (again, primarily ‘‘preparers’’) who
opposed the possession standard and/or favored provisions
limiting their legal exposure – safe harbor and af?rmative
defenses – had signi?cantly more in?uence on the ?nal
outcome than letters from non-credentialed parties, pri-
marily authored by a broad class of what Laughlin and
Puxty (1983; see also Cooper & Robson, 2006) refer to as
‘‘information users’’ favoring the original, stricter SEC pro-
posal. Fortifying these ?ndings, the results depicted in Pa-
nel D suggest that while the vast majority of letters were
received from non-credentialed sources, letters from cre-
dentialed actors were typically negative, and these nega-
tive letters were the letters the SEC overwhelmingly cited
(by a margin of 78%) as having in?uenced its deliberations.
These ?ndings are harmonious with Luke’s (2005, chap. 1)
?rst dimension of power in that the policy preferences of
regulatees prevailed over those who would bene?t from
the regulation, thus responding to Cooper and Robson’s
(2006, p. 426) call for research probing the overt applica-
tion of power in the policy formation process.
More generally, extending the extant institutional the-
ory literature dealing with endogenization, the relatively
passive, narrowly developed efforts of defendants directed
at favorably in?uencing speci?c Circuit Court verdicts for
violating regulations after they were issued became much
more active (Oliver, 1991), as those more generally regu-
lated also sought to in?uence the rules of the game that
were to contain them by before they were issued (Law-
rence, 2006; Scott, 2008: Suddaby, 2010). In contrast with
existing endogenization research (e.g., Edelman et al.,
1999, 2011), as revealed by our manifest content analysis,
the SEC sought to render the regulation less ambiguous
with regard to applying the ‘‘in knowing possession’’ stan-
dard. Moreover, those regulated then sought to in?uence
the SEC proposal to also make it more speci?c with respect
to including ‘‘safe harbor’’ provisions and broader ‘‘af?rma-
tive defenses.’’ Thus, depending on the context, regulatees
may at times prefer ambiguity as also found by Edelman
and her colleagues, and at times a stricter speci?cation of
provisions in regulations if it provided those regulated
with more room to maneuver. Consequently, the regula-
tory regime applied to insider trading should not be char-
acterized as fully endogenous (Edelman et al., 1999), but
rather as the more nuanced characterization of being
‘‘mutually endogenous’’ (Edelman & Stryker, 2005), as both
the regulator and regulatees came away from the process
with something they prized: the SEC had codi?ed the
‘‘knowing possession’’ standard and regulatees had ob-
tained room to maneuver within the new regulation. It
consequently appears that the institutional environment
does indeed affect those regulated, and that those regu-
lated play an active role in de?ning, creating, and shaping
that very environment (DiMaggio & Powell, 1991, p. 11–
15; Meyer, 2008; Selznik, 1996). Therefore, in marked con-
trast with Oliver’s (1991; see also Davis, McAdam, Scott, &
Z. Bozanic et al. / Accounting, Organizations and Society 37 (2012) 461–481 475
Zald, 2005) proposition that the tactics of regulatees may
vary from conforming to resistant, from passive to active,
from preconscious to controlling, from impotent to in?u-
ential, and that regulatees are likely to use the more active
tactics directed at modifying the rules of the game in order
to gain advantage when institutional expectations are
localized, weakly enforced or ambiguous, our results sug-
gest that in the case of recent efforts to regulate insider
trading, institutional expectations were expressed quite
speci?cally (rather than ambiguously) at the federal
(rather than local) level, wherein a tightening and harmo-
nization of enforcement were being actively (rather than
weakly) sought across all federal jurisdictions, and still
those regulated were able to effectively in?uence the reg-
ulations that were to contain them.
While we conclude that the relatively subtle endogeni-
zation line of inquiry established by Edelman and her
colleagues is compelling and potentially useful to a wide
range of issues of interest to accounting scholars, we
remain theory agnostics, and we concur with Edelman
et al. (2011) that the endogenization thesis does not con-
tradict, but rather extends alternative perspectives, as well
as with Greenwood et al. (2008), for example, who call for
multiple theoretical perspectives being applied to better
understand processes of institutionalization. We believe
that not only should accounting scholars empirically
examine the possible continuing presence of insider trad-
ing as shaped by existing regulatory grids within the ortho-
dox tradition sketched in our introduction, but also that
research should be pushed backwardly to probe the ex-
ante in?uence of those regulated on the regulations that
are to constrain their behavior by examining the full ‘‘reg-
ister’’ of regulatee action strategies. For example, both the
‘‘older’’ institutional theory perspective of Selznick (1949),
Selznick (1957) and regulatory capture (Stigler, 1971)
suggest that more active, direct and political in?uence at-
tempts, including lobbying, supplying and hiring regulator
staff, inducing budgetary pressure, and shaping judicial
outcomes through amicus participation, can also impact
the actions of regulators. Here, the endogenization thesis
may inform these alternative theoretical perspectives
thereby suggesting that these theories may be used symbi-
otically to explore regulation. Supportive of this point, a
preliminary examination we conducted revealed that the
era during which SDIT was being developed was an elec-
tion year that was marked by a spike in campaign contri-
butions to George W. Bush, members of the House
Commerce Committee, and members of the Senate Bank-
ing Committee (both of which exert SEC oversight) from
the securities industry, which dominated contributions
from other industries (Center for Responsive Politics,
2000a,b; for related scholarly literature, see Dwyer &
Roberts, 2004; Mizruchi, 1992; Poole & Daniels, 1985;
Thornburg & Roberts, 2008). Concurrent with these contri-
butions, the press predicted the end of Levitt’s reign as SEC
Chair because of his advocacy of stricter regulations, com-
mented on a threatened reduction in the SEC’s budget, and
reported on the appointment of a new Chair with a ‘‘kinder
and gentler’’ regulatory stance toward the business com-
munity – Harvey Pitt who had previously served as an
advocate for the ?nancial reporting community by acting
as the attorney for the AICPA and Big 5 ?rms (WSJ,
2002a,b; for illustrative recent press coverage, see WSJ,
2011).
6
We conclude that future research may be meaning-
fully directed at probing the harder as well as softer edge
processes by which those regulated seek to in?uence the ac-
tions of regulators.
We also believe that the full ‘‘register’’ of the SEC’s
‘‘voice’’ should be subjected to research scrutiny. While
our study focused on the efforts of the SEC to formally de-
velop a new rule on insider trading, such regulators as the
SEC do have other options that may be strategically de-
ployed which do not entail directly considering regulatee
comments. We urge future research probing efforts by
the SEC to strategically avoid endogenization by selectively
applying a range of prerogatives, such as: selective, differ-
ential enforcement (see O’Brien, 2007, for further guid-
ance); taking adjudication action against speci?cally
named parties rather than a category of parties; developing
and applying non-binding as opposed to legislative rules;
expressing general statements of policy; issuing interpre-
tive rules, which do not alter legal rights, but express reg-
ulators’ guidance regarding how to comply with existing
laws; and stating procedural rules which re?ect ‘‘the Con-
gressional judgment that such rules, because they do not
directly guide public conduct, do not merit the administra-
tive burdens of public input proceedings’’ (Gellhorn & Le-
vin, 1997, pp. 296–341).
In a critique of neo-institutional theory, Cooper et al.
(2008) observed that this perspective tends to neglect cer-
tain ‘‘voices’’ within the social/institutional milieu, by
implication, those voices are what Edelman et al. (2011)
termed the ‘‘disenfranchised’’ whose rights may be under-
mined by institutional processes. Consistent with this
theme, our manifest content analysis of comment letters
(Table 2) suggests that those letters not cited by the SEC
as having in?uenced its deliberations were those of the in-
tended bene?ciaries of the proposed regulation—individ-
ual investors, the ‘‘user’’ class (Laughlin and Puxty,
1983),—who supported the proposed possession standard
sans safe harbor modi?cations granting insiders room to
maneuver. This may suggest not ‘‘missing voices’’ in the
regulatory milieu, as their letters were sent to and logged
in by the SEC, but rather a deaf ear turned to the disenfran-
chised, thereby rendering them disempowered. As noted
above, our contrasting results for ‘‘cited’’ and ‘‘non-cited’’
letter writers (Table 2, Panels B–D) are harmonious with
Luke’s (2005) ?rst dimension of power wherein power is
overtly exercised by those to be regulated in that their
6
Added to the threat of budget reductions, the SEC may also be sued for
not being responsive to those regulated: The U.S. Chamber of Commerce,
for example, alleges in a lawsuit that the SEC did not pay suf?cient
consideration to its comments submitted during the comment phase
concerning a proposed regulation of mutual funds. The court ruled that the
SEC did not violate the law in creating the Rule, but it did remand the SEC to
reconsider the comment letters. The SEC wrote in response that it did
reconsider the comment letters and chose to not alter its original position
expressed in the ?nal regulation. The Chamber of Commerce has since ?led
another suit. Exacerbating the potential for regulator capture, a recent U.S.
Supreme Court decision (Citizens United v. Federal Election Commission,
2010) removes many restrictions on corporate campaign contributions to
congressional and presidential candidates (Denniston, 2010).
476 Z. Bozanic et al. / Accounting, Organizations and Society 37 (2012) 461–481
policy preferences prevailed over those who were to be
served and protected by the regulation. By implication,
although the SEC has long pledged an allegiance to protect-
ing investors by increasing their access to relevant and reli-
able information, thereby fostering a level playing ?eld
(e.g., Levitt, 1998; for a critique, see Cooper & Robson,
2006, p. 427), this pledged position may perhaps be de-
scribed as an espoused theory (Argyris, 1977). The actual
theory in use (Argyris, 1977) may be something quite differ-
ent: despite the rhetoric surrounding the regulation of insi-
der trading, the SEC was quite, almost solely responsive to
the position of those to be regulated whose goals were sur-
vival, pro?ts and growth, and values revolved around open
markets unfettered by burdensome regulations (see also
Merino & Neimark, 1982, for elaboration of this theme).
It is here that Luke’s (2005) second dimension of power
gains traction. Within this dimension, those with power
covertly set the agenda for what is to be subjected or not
subjected to open debate and become the target or non-
target of emerging public policies (in accounting, see Coo-
per & Robson, 2006, p. 426; Malsch & Gendron, 2011, p.
458; O’Leary, 1985, p. 88). Although we did examine the
letters of those not cited by the SEC as having in?uenced
its deliberations (Table 2, Panels B–D), our work focused
primarily on those who are enfranchised and empowered
within the regulatory/political arena. However, even here
the issue of overlooked ‘‘voices’’ nevertheless still arises—
those voices being those of the super enfranchised and
super empowered companies that house inside traders
(Edelman et al., 2011, pp. 923 and 941). On this theme,
Krawiec (2003, p. 487) observed that:
Across a range of legal regimes – including environmen-
tal, tort, employment discrimination, corporate, securi-
ties, and health care law – United States law reduces or
eliminates enterprise liability for those organizations
that can demonstrate the existence of ‘effective’ inter-
nal compliance structures. Presumably, this legal stan-
dard rests on an assumption that internal compliance
structures reduce the incidence of prohibited conduct
within organizations. . . [L]ittle evidence exists to
support that assumption.
Subsequently, Krawiec (2005, p. 572) marshaled
evidence to support this conjecture:
[A]t least since the adoption of the Organizational
Sentencing Guidelines (OSG) in 1991, the U.S. legal
regime has been moving away from a system of strict
vicarious liability toward a system of duty-based orga-
nizational liability. Under this system, organizational
liability for agent misconduct is dependent on whether
the organization has exercised due care to avoid the
harm in question, rather than on traditional agency
principles of ‘respondent superior.’ Courts and agencies
typically evaluate the level of care exercised by the
organization by inquiring whether the organization
had in place ‘internal compliance structures’ ostensibly
designed to detect and discourage such conduct. . . .I
argue, however, that any duty-based liability system
that conditions the organization’s duty on the presence
of internal compliance structures is likely to fail
because courts lack suf?cient information about the
effectiveness of such structures. As a result, an internal
compliance-based liability system encourages the
implementation of largely cosmetic internal compliance
structures that reduce legal liability without reducing
the incidence of organizational misconduct. (see also
Edelman et al., 2011, for further empirical support)
These ‘‘internal compliance structures’’ are precisely
the focus of Edelman and her colleagues (1999, 2011) con-
cerning the Civil Rights Act, who concluded that such
structures are symbolic rather than substantive demon-
strations of conformity to the Act. Consistent with this po-
sition, perhaps because of the presence of corporate codes
of ethical conduct prohibiting their members from engag-
ing in insider trading, or SOX-required internal control
structures exhibiting, for example, a proper ‘‘tone at the
top,’’ companies have tended to not be held liable for the
insider trading of their agents (Bainbridge, 1999). How-
ever, given the continuing existence of insider trading as
evidenced by, albeit mixed, empirical research sketched
in the introduction, and celebrated cases discussed in the
press in which scapegoats were sacri?ced (Cooper & Rob-
son, 2006, p. 429), it appears that these compliance struc-
tures may serve as mere symbolic displays rather than
substantively preventing insider trading (Meyer & Rowan,
1977). It may be that as it is now practiced the Administra-
tive Procedures Act, forti?ed by political pressure being
brought to bear and a neo-liberal ideology (Campbell,
2010; Cooper & Robson, 2006; Davidoff, 2010), has tipped
the balance in favor of those regulated (information pre-
parers per Laughlin & Puxty, 1983) at the expense of those
who are intended to bene?t from regulation (information
users). On this point, Merino and Neimark (1982, p. 51)
forcefully observed that the original 1933 and 1934 securi-
ties acts ‘‘may have contributed to the virtual absence of
any serious attempts to ensure corporate accountability
by broadening the set of transactions for which corpora-
tions are to be held accountable. . . [W]e must open the
agenda of accounting research and accounting policy to
consider the possibility of substantive corporate regulation
rather than the tokenism of legislation such as the securi-
ties acts.’’ Consistent with the endogenization thesis we
have explored, the role of regulatees in in?uencing regula-
tors to abandon the ‘‘respondent superior’’ principle, of
removing it from the agenda of open debate in the forma-
tion of public policy (Lukes, 2005), is worth further scru-
tiny, as well as their efforts in shaping the development
and application of the Administrative Procedures Act. It
may be that the SEC’s ‘‘decision’’ to issue the regulatee-
in?uenced insider trading regulation was not really a deci-
sion at all, but had already been preordained by the perva-
sive, institutionalized ideology of neo-liberalism and allied
commitment to free and open markets, unfettered by
overly restrictive regulations (Campbell, 2010; Ferraro,
Pfeffer, & Sutton, 2005). Here, consistent with a market
for excuses (Watts & Zimmerman, 1979; for telling cri-
tiques, see Lowe, Puxty, & Laughlin, 1983; O’Leary, 1985)
in a tone supportive of a neoliberal ideology, Manne
(1966) reasoned in his seminal paper that insider trading
should be legal because it offers an ef?cient form of
Z. Bozanic et al. / Accounting, Organizations and Society 37 (2012) 461–481 477
compensation for insiders, and by implication, that Rule
10b5-1 produces an economic equilibrium; according to
this interpretation, had a strict ‘‘knowing possession’’ rule
been enforced, investors may have had to bear signi?cant
costs in terms of higher (?xed) compensation for insiders.
In contrast with this orthodox, economics-based perspec-
tive, it may well be that insider trading could be effectively
curbed by once more adhering to strict, vicarious liability
and the traditional, pre-1991 principle of ‘respondent
superior,’ or by modifying the Administrative Procedures
Act to require that the views of bene?ciaries of proposed
regulations be considered at least on par with those of
regulatees. This adherence may proceed by invoking the
original ‘‘controlling person provision’’ speci?ed, albeit
ambiguously in Section 20 of the 1934 Act. In essence,
the agenda should be opened up. Overall, our analysis sug-
gests that the existence of endogenization is something of
a double-edged sword (see also, Edelman et al., 2011, p.
899). On the justice edge, it suggests that government is
responsive to those regulated. On the injustice edge, it sug-
gests that it is differentially responsive in which the agen-
da is managed. We believe that this is a critical issue for
future research to pursue.
On the other hand, such tweaking of law may not gain
suf?cient positive effect if the neo-liberal ideology, or more
nearly, worldview (Laughlin & Puxty, 1983) of supporting
free and open markets prevails. It is here that Luke’s
(2005) third dimension of power gains traction. This
dimension of power is covert in nature and not directly vis-
ible because the individual becomes a willing participant
complicit in the exercise of power in which an ideology
with which the individual is encultured becomes accepted
as the ‘‘natural order of things,’’ thereby obviating the ex-
plicit exercise of power. Extending this dimension as it
concerns public accounting regulation by incorporating a
line of reasoning developed by Foucault (e.g., 1983),
Malsch and Gendron (2011, pp. 458–459) reasoned that
this third form of power:
..shapes people’s thoughts and wishes so that differ-
ences of interest are prevented from occurring in the
?rst place. . .. [T]he absence of grievances therefore does
not necessarily imply genuine consensus because
power also operates ideologically, in?uencing people’s
thoughts and desires so that they accept their role in
the existing order of things.
Fromthis base, they went onto propose that the prevail-
ing discourse used to express ideology constitutes people
as subjects and structures the range of actions that are pos-
sible, ruling in some as legitimate and ruling others out as
beyond consideration or even recognition. They concluded
that (p.459) ‘‘[H]ow people think about and make sense of
an object, such as a regulation, does not emerge out of the
blue, but in a discursive context characterized with certain
conditions of possibility.’’ According to this perspective,
then, the SEC framed the proposed SDIT proposal using a
form of discourse implicitly supportive of the neo-liberal
ideology of ‘‘free and open markets’’ within which ‘‘infor-
mation preparers’’ and ‘‘information users’’ played estab-
lished roles with scripted positions in which the
existence of homo economicus was taken for granted. Here-
in, by aligning the goals of the organization of survival,
pro?ts and growth with those of its manager/insiders of
survival and pro?ts, the goals of the user/shareholder for
return on investment would be better assured. In turn, in-
sider trading provides an ef?cient form of compensation
(Manne, 1966). According to this ideology, it would be ac-
cepted that managers should be permitted, indeed encour-
aged to invest in their company amid an espoused theory
of fostering a level playing ?eld: the principle of manage-
ment trading is already accepted by preparers and users alike.
However, our empirical results portrayed in Panels B–D re-
veal that even though those who were to bene?t from the
proposed regulation and mouthed the correct words, they
were still not cited by the SEC as having in?uenced its
deliberations.
But beyond information users/investors, there exist
other ‘‘missing voices’’ (Cooper, Ezzamel, & Willmott,
2008) whose views were never attended to because even
they accept that those who are primary constituents of
‘‘free and open markets’’ should attend to ‘‘market regula-
tion’’ by the taken-for-granted-as-appropriate SEC. Accord-
ing to Cooper and Robson (2006, p. 427),
This naturalization suggests the dominance of a pro-
capital orientation for those who are involved in
accounting regulation, . . .[but that] general economic
welfare for a society as a whole is unlikely to be
achieved by the single minded pursuit of shareholder
interests. Yet there is now little discussion of the
requirements of other groups in society, such as
employees or consumer groups, for reliable ?nancial
information for their purposes, or how ideals such as
organizational and corporate accountability might be
usefully conceived and implemented.
Possible off-the-table actions, for example, might be
making management trading illegal, period, or by making
it illegal to sell stock acquired as compensation until
3 years after a manager has left a company, as regulated
and enforced by an agency other than the SEC so as to
engender ‘‘cultural standards of decency’’ (March, 1987,
p. 159). Of course, because Luke’s (2005) third dimension
of power is largely invisible, it may be the case that its play
will remain inherently undeterminable by research evi-
dence, thus necessitating application of a proliferation of
theories going beyond the endogenization strand of insti-
tutional theory we have advanced (O’Leary, 1985).
In closing, we concur with Edelman and Stryker’s posi-
tion (2005, p. 544) that researchers concerned with prob-
ing the dynamics of regulation should ‘‘treat law not as a
force outside of the socially embedded economy, but
rather as a force within, and a product of, that economy.’’
Acknowledgements
We wish to thank Lauren Edelman, John Meyer, Keith
Robson and Roy Suddaby for their thoughtful suggestions,
as well as the Editor, David Cooper, and the anonymous
reviewers for their guidance. We are also grateful to Alan
Jagolinzer and Daniel Russomanno for their research assis-
tance, and also the Deloitte & Touche Foundation and the
KPMG Foundation for their generous support.
478 Z. Bozanic et al. / Accounting, Organizations and Society 37 (2012) 461–481
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doc_902882096.pdf
Accounting research, whether founded in an economics or sociological paradigm, has generally
treated regulation as an exogenous part of the environment that shapes the behavior
of those who operate within it. Recently, joining those who have advanced the regulator
capture hypothesis, the exogenous presumption of the regulatory framework has been
challenged by institutional theorists within the sociology literature, and it has been reasoned
that those regulated seek to influence the regulations applied to them to gain advantage.
In effect, the actions of those regulated ‘‘endogenize’’ the regulations that gird them.
Employing this emerging strand of institutional theory research, we probe efforts to
‘‘endogenize’’ the Securities and Exchange Commission’s (SEC) regulation of insider trading.
More specifically, applying both latent and manifest content analyses, we examine
archival material relating to the development of insider trading regulations, focusing in
particular on the social negotiation of the SEC’s Rule 10b5-1, which prohibits company offi-
cers from trading in their company’s stock while in ‘‘knowing possession’’ of material, nonpublic
information. Our results suggest that those regulated by 10b5-1 effectively influenced
this regulation (viz., by way of successfully advocating for an affirmative defense
provided for so-called ‘‘planned trades’’). Our analysis suggests that endogenization is an
on-going, recursive process marked by moves and counter-moves among contending factions.
Implications are explored.
The social constitution of regulation: The endogenization of insider
trading laws
Zahn Bozanic
a
, Mark W. Dirsmith
b,?
, Steven Huddart
c
a
Fisher College of Business, The Ohio State University, 2100 Neil Avenue, Columbus, OH 43210, United States
b
Smeal College of Business and The Social Thought Program, Penn State University, 380 Business Building, University Park, PA 16802, United States
c
Smeal College of Business, Penn State University, 340 Business Building, University Park, PA 16802, United States
a b s t r a c t
Accounting research, whether founded in an economics or sociological paradigm, has gen-
erally treated regulation as an exogenous part of the environment that shapes the behavior
of those who operate within it. Recently, joining those who have advanced the regulator
capture hypothesis, the exogenous presumption of the regulatory framework has been
challenged by institutional theorists within the sociology literature, and it has been rea-
soned that those regulated seek to in?uence the regulations applied to them to gain advan-
tage. In effect, the actions of those regulated ‘‘endogenize’’ the regulations that gird them.
Employing this emerging strand of institutional theory research, we probe efforts to
‘‘endogenize’’ the Securities and Exchange Commission’s (SEC) regulation of insider trad-
ing. More speci?cally, applying both latent and manifest content analyses, we examine
archival material relating to the development of insider trading regulations, focusing in
particular on the social negotiation of the SEC’s Rule 10b5-1, which prohibits company of?-
cers from trading in their company’s stock while in ‘‘knowing possession’’ of material, non-
public information. Our results suggest that those regulated by 10b5-1 effectively in?u-
enced this regulation (viz., by way of successfully advocating for an af?rmative defense
provided for so-called ‘‘planned trades’’). Our analysis suggests that endogenization is an
on-going, recursive process marked by moves and counter-moves among contending fac-
tions. Implications are explored.
Ó 2012 Elsevier Ltd. All rights reserved.
Introduction
Trading based on privileged access to information can
demoralize investors and destabilize investment. It
has utterly no place in any fair-minded, law-abiding
economy. . . the American people see it, bluntly, as a
form of cheating. Let’s state it clearly, and in the
un-ambiguous terms that it deserves: Insider trading
is legally forbidden. It is morally wrong. And it is eco-
nomically dangerous (SEC Chair, Levitt, 1998).
Rule 10b5-1 addresses the issue of when insider trading
liability arises in connection with a trader’s ‘‘use’’ or
‘‘knowing possession’’ of material nonpublic informa-
tion. This rule provides that a person trades ‘‘on the
basis of’’ material nonpublic information when the per-
son purchases or sells securities while aware of the
information. However, the rule also sets forth several
af?rmative defenses, which we have modi?ed in
response to comments (Securities and Exchange Com-
mission, 2000a, p. 2).
A recent rule change [10b5-1] at the Securities and
Exchange Commission, authorizing prearranged sell-
offs of executives’ stock, gives added insulation to alle-
gations of insider trading and could provide former
Enron Chairman and Chief Executive Kenneth L. Lay
and other executives with a built-in defense. . .. Class
0361-3682/$ - see front matter Ó 2012 Elsevier Ltd. All rights reserved.http://dx.doi.org/10.1016/j.aos.2012.06.003
?
Corresponding author.
E-mail addresses: [email protected] (Z. Bozanic), [email protected] (M.W.
Dirsmith), [email protected] (S. Huddart).
Accounting, Organizations and Society 37 (2012) 461–481
Contents lists available at SciVerse ScienceDirect
Accounting, Organizations and Society
j our nal homepage: www. el sevi er. com/ l ocat e/ aos
action lawsuits against Enron maintain that Lay made
more than $100 million from stock sales before the
company’s value plummeted. (Los Angeles Times,
2002, p. A12; see also Wall Street Journal (WSJ),
2002a, 2002b, 2004, 2005, 2006).
Approximately $15 trillion is exchanged on organized
US stock markets annually. Not surprisingly, the trading
of stocks is a heavily regulated and institutionalized activ-
ity, with particular attention accorded to containing insider
trading in order to maintain a ‘‘level playing ?eld’’ among
investors (Levitt, 1998)—a position af?rmed by the U.S. Su-
preme Court in United States v. O’Hagan (1997; see Table 1
for synopsis), which states that the ‘‘animating purpose’’ of
federal securities laws is to ‘‘insure honest securities mar-
kets and thereby inspire investor con?dence.’’
Insider trading and its regulation have been dealt with
in the orthodox accounting, economics and ?nance litera-
tures as economic phenomena. Prior empirical insider
trading research has focused mostly on the extent to which
regulation is effective in removing insiders’ capacity to
pro?t from their information advantage, and also on how
insiders respond to changes in regulations. Prior evidence
on both issues has been mixed within the orthodox litera-
ture that has treated regulations as an exogenous force
shaping insider trading. For example, Givoly and Palmon
(1985) found a low incidence of insider trading in anticipa-
tion of impending public disclosures of news already
known by insiders. Park, Jang, and Loeb (1995) found that
insiders increased their trades several weeks prior to earn-
ings announcements, but refrained from trading in the per-
iod immediately preceding the announcement. Noe (1999)
found that insiders’ trades were made after, not before,
management earnings forecasts were issued. And, Hud-
dart, Ke and Shi (2007) reported that the distribution of
insiders’ trades within ?scal quarters and across ?rms indi-
cates that insiders pro?t from foreknowledge of soon-to-
be-public information about the ?rm, but avoid pro?table
trades when the risk associated with trading is high.
Regarding response to regulatory change, Gar?nkel
(1997), for example, found that, after the implementation
of the Insider Trading and Securities Fraud Enforcement
Act (ITSFEA) of 1988, insiders were more likely to postpone
trading driven by a desire to liquidate investments until
after negative earnings surprises were announced rather
thantrade strategically. Similarly, Seyhun(1992) found that
insiders were less likely to trade prior to company takeover
announcements, although the volume and pro?tability of
insider trading were rising over time, but failed to observe
any evidence of a decline in insider trading activity immedi-
ately following the passage of the Insider Trading Sanctions
Act (ITSA) of 1984, or the Insider Trading and Securities
Fraud Enforcement Act (ITSFEA) of 1988. Jeng, Metrick,
and Zeckhauser (2003) estimated that the pro?ts insiders
derived remains quite small. Jagolinzer (2009) examined
the strategic trade of insiders following the SEC’s enactment
Table 1
Insider trading cases identi?ed by government of?cials as prominent.
United States v. O’Hagan
A law ?rm partner was convicted of violating insider trading laws by a district court, but the Eighth Circuit Court reversed the convictions. The
Supreme Court overturned the Eighth Circuit Court, ?nding the convictions valid. The Court found that liability under 10b could be based on the
‘‘misappropriation theory,’’ a theory which ?nds liability on the basis of trading on nonpublic information by a corporate ‘‘outsider’’ in breach of a
duty owed to the source of the information, rather than the trading party. In this case, the law ?rm partner acquired the nonpublic information
when his ?rm had been retained by the client for representation of their con?dential tender offer. The Court also held that the SEC was within its
rule making ability when it enacted Rule 14eÀ3(a), which allowed liability to be established without a showing that the trading at issue entailed a
breach of a ?duciary duty. Rule 14eÀ3(a) requires disclosure or abstention from trading on nonpublic information, however acquired
United States v. Chiarella
This case was heard before the Supreme Court after a conviction by a jury and af?rmation of that conviction by the Second Circuit of a violation of 10b.
The alleged violator, an employee of a printer handling corporate takeover bids, was not a corporate insider. The Supreme Court held that his status
made the conviction improper, for he owed no ?duciary duties to disclose the information he possessed. The duty to disclose arises from (i) a
relationship which affords access to inside information, and (ii) the unfairness of allowing such trade without disclosure. The justices were divided
in their opinion, with ?ve justices offering opinions (majority, two concurrences, and two dissents). The majority consensus was on the lack of an
af?rmative duty for non-corporate insiders to disclose material non-public information
United States v. Teicher
Defendants appealed convictions for insider trading on two theories: evidence of bias was excluded and jury was improperly instructed on the
‘‘misappropriation theory.’’ This court af?rmed the convictions. With regard to ‘‘misappropriation theory,’’ the court determined the jury
instruction was harmless. This court suggested that mere possession of inside information would be enough to support a conviction and that
requiring a causal connection between the information and trade could frustrate attempts to distinguish legitimate and illegitimate trades. This
court’s test became known as the ‘‘knowing possession’’ test, although the court did not apply that standard to the facts of this case
United States (SEC) v. Adler
SEC brought action against stockholders and others for alleged insider trading. Stockholder had traded a large number of shares shortly after a call
received following a board meeting where non-public information was discovered that would result in a drop in the stock’s value. The lower court
granted summary judgment in favor of the stockholder on some counts, and sent the other counts to the jury. The jury could not reach a decision,
and a mistrial resulted. This court determined ?rst that the appropriate test for a violation was the ‘‘use test,’’ and that mere possession of non-
public information was not a violation per se. The use test left to the jury the determination of whether the non-public information was actually
used in the trades that are alleged to be violations. The case was then sent back for trial again with this new test as the governing rule
United States v. Smith
Following a conviction in the lower court, the defendant appealed. The Ninth Circuit Court af?rmed the conviction on the evidentiary issue as well as
on the substance of the alleged insider trading violation. With respect to the latter, the Court held that internal corporate earnings projections are
material inside information and proof of actual use is required to support a conviction. The Court addressed the Second Circuit’s Teicher opinion
and rejected its reasoning in favor of the reasoning of the Adler court in the Eleventh Circuit. The Court held that the SEC or other government
entity must demonstrate that the suspected inside trader actually used material nonpublic information in consummating his transaction.
462 Z. Bozanic et al. / Accounting, Organizations and Society 37 (2012) 461–481
of Rule 10b5-1 and found that insider plan initiations made
prior to adverse news events and plan terminations made
ahead of positive news events were associated with abnor-
mal returns. Finally, Brochet (2010) found that SOXreduced
the incentives for insiders to sell stock in advance of the
public release of negative information. Irrespective of
empirical evidence, allegations of improper and highly prof-
itable insider trading continue to receive broad publicity.
Such allegations and incidents raise public concern of wide-
spread and grave impropriety (see, for example, Wall Street
Journal, WSJ, 2010, 2012; London Evening Standard, 2010;
Telegraph, 2010). This voiced concern suggests a need to
more fully understand the complex social dynamics that
have been largely unexplored in existing research.
More speci?cally, none of the prior studies yielding
mixed empirical results on insider trading and its regula-
tion has applied a sociological perspective. Concerning
adherence to the single orthodox theoretical economics
perspective, Lowe, Puxty, and Laughlin (1983), for exam-
ple, advocated that alternative theoretical perspectives be
applied to understanding the complex dynamics of
accounting regulation and standards development, while
O’Leary (1985, p. 94) observed that ‘‘rapidity in scienti?c
progress would require a proliferation of competing theo-
ries and research programs being built side by side.’’ One
potential reason for the mixed results, which we explore
in this paper by applying institutional theory (e.g., Meyer
& Rowan, 1977), is that the regulation governing insider
trading may not be wholly exogenous. In other words, it
is possible that those who are to be regulated may seek
to in?uence emerging regulations so that the ultimate im-
pact of the rules is muted or subverted, thereby effectively
endogenizing regulatory regimes (Campbell, 2004, 2010;
DiMaggio & Powell, 1991; Edelman, Uggen, & Erlanger,
1999, 2011). We will, in turn, marshal evidence by apply-
ing both latent (qualitative) and manifest (quantitative)
content analyses in examining the endogenization process
(for discussion of incorporating both qualitative and quan-
titative methods in a single study, see Berg, 2004; Covales-
ki & Dirsmith, 1990; Downey & Ireland, 1979; Jick, 1979).
In the next section, we review institutional theory in
more detail, especially with respect to the issue of the
endogenization of regulations, concluding with the state-
ment of the central research question addressed in our
work. Next, we detail the latent and manifest content anal-
yses research methods we employ, as well as the archival
material we examine. The third section describes our qual-
itative assessment of the historical development and trans-
formation of insider trading regulations to render them
less stringent, as well as the quantitative analysis of letters
of comment submitted to the SEC pertaining to the 10b5-1
regulation of insider trading. The ?nal section explores
implications derived from our analysis.
Theoretical framework
Traditional views of in?uencing governmental regulations
Although it may now be seen as naïve, traditionally
authoritative rules have been viewed as concrete, determi-
native and able to coerce compliance on the part of those
regulated – a stance generally consistent with a legal the-
ory which posits that law is ‘‘autopoietic’’ and is inter-
preted as self-referential, autonomous and characterized
by an internal logic sealed off from social in?uence. This
stance is more generally seen as being part of the ‘‘materi-
alistic perspective’’ which ‘‘portrays organizations as ra-
tional wealth-maximizers, and sees the law as a system
of substantive incentives and penalties’’ (Edelman, Fuller,
& Mara-Drita, 2001, p. 892; Coglianese and Kagan, 2007).
It has, of course, long been recognized that those regu-
lated are able to in?uence the regulations that are intended
to curb their actions, with President Woodrow Wilson, for
example, opining in 1913 that ‘‘If the government is to tell
big business men how to run their business, then do not
you see that big business men have to get closer to the gov-
ernment even than they are now? Do not you see that they
must capture the government in order not to be restrained
too much by it? Must capture the government? They have
already captured it!’’ (Wilson, 1961). Consistent with Wil-
son’s observation, and also residing within the materialist
perspective, the theory of regulator capture has been pri-
marily developed in economics and advanced in a variety
of literatures (for early formulations, see Averch & Johnson,
1962; Bernstein, 1955; Stigler, 1971; for illustrative appli-
cation in accounting, see Richardson, 2009; Roberts & Kur-
tenbach, 1998). Here, a regulatory agency is said to be
‘‘captured’’ when it actually advocates for the interests of
those to be regulated, especially large commercial enter-
prises having much at stake and considerable resources
to wield in shaping policy outcomes they prefer, instead
of the agency acting in the public’s interest. This form of
in?uence is seen as very active and overt.
In turn, Wilson (1989, pp. 83–88) offered a seminal cri-
tique that a variety of societal changes had lessened the
threat of regulator capture by those regulated, including
the ability to communicate with diverse groups affected
by regulation, a dramatic redistribution of political re-
sources and a marked increase in press coverage of regula-
tory actions. Despite the veracity of such critiques, the
regulator capture thesis has persisted and even been spe-
ci?cally applied to the SEC (see, for example, Bloomberg
News, 2009; United States District Court for the District
of Columbia, 2008; New York Times, 2010; Taibbi, 2011).
Nevertheless, it has been held that regulatory capture, with
its more overt, direct acquisition of a regulator in which it
advocates for those regulated, may be overly simplistic. For
example, Davidoff (2010) reasoned that the in?uence of
those regulated may be much more subtle and indirect,
and involve an ‘‘ideological and social capture’’ of such reg-
ulators as the SEC. For example, those selected for leader-
ship positions often come from backgrounds sharing
worldviews with those regulated, speci?cally, a commit-
ment to free and open markets with a minimum of regula-
tion—termed a ‘‘neoliberal ideology’’ or simply interact
more with representatives from industries they regulate
(for discussion of the role of neoliberal ideology in
accounting regulation, see Cooper & Robson, 2006). With
such an ideological foundation and continuing dialog, the
thought patterns being brought to bear in formulating reg-
ulations are subtly in?uenced.
Z. Bozanic et al. / Accounting, Organizations and Society 37 (2012) 461–481 463
Economic sociologists having a link with institutional
theory have recently invoked the regulatory capture theme
in exploring the mortgage securitization crisis, with, for
example, Fligstein and Goldstein (2010, p. 31, 63, 64; see
also Lounsbury & Hirsch, 2010, p. 12) observing that a
‘‘type of passive regulatory capture’’ (although they left
‘‘type’’ unde?ned) existed in which bankers expressed
their wishes, largely in the form of espousing an ideology
of free, ef?cient markets in which regulators responded
with favorable regulations. More speci?cally, they con-
cluded that, ‘‘As the activities of banks expanded and they
invented more and more ?nancial products, bankers were
consistently able to convince regulators and the executive
and legislative branches of government to stay away from
regulating the market. Their basic arguments were that the
?nancial innovations in the market were producing robust
economic growth and that at their core these innovations
made a market that was able to control its own risks,’’ a
view shared by some in the accounting research commu-
nity (e.g., Benston, 1973). But, this concern for an unde-
?ned ‘‘type of regulatory capture’’ in which regulators
relinquished their duties, also suggests that this concept
may have lost its precision for guiding research.
Also broaching the topic of the ?nancial meltdown,
Campbell (2010) reasoned that market activity is always
in?uenced by political rules and regulations, but that
the neoliberal ideology favoring free and open markets
and minimizing regulation has dominated in the U.S. over
the last three decades; here, for example, such prominent
federal regulators as Alan Greenspan and Arthur Levitt
warned that regulation would undermine the ef?ciency
of the market and lead to distortions. Not surprisingly,
the National Bureau of Economic Research found that
U.S. ?nancial regulations dropped signi?cantly during this
time period under the guise of regulatory reform, includ-
ing those of the SEC (Wolf, 2009). Also touching upon the
pervasive effects of the free market ideology, Ruptsova
et al. (2010) reasoned that not only does government cre-
ate and shape markets, but also that the unfolding nature
of markets and their allied logics shape governmental
regulation. In turn, they theorized that the state is itself
endogenized in which its regulations are institutionally
in?uenced in terms of their development, form and con-
tent – the precise theme explored in more detail in the
next subsection. On this point, Ferraro, Pfeffer, and Sutton
(2005, p. 11) observed that ‘‘market-based exchanges are
considered to be the baseline and the natural and the
best option for organizing activity,’’ so much so that such
notions as ‘‘the market’’ are not just ideologies, but may
themselves have become institutionalized. Similarly,
exploring the political processes attendant to accounting
standards promulgation, Laughlin and Puxty (1983) rea-
soned that ideology, or in their terms, worldview, is so-
cially constituted for a given class of people who share
a common set of experiences that in time ‘‘crystallizes’’
into a value system or perspective in order to enable
them to come to terms with reality. This notion of world-
view enables researchers to partition people concerned
with ?nancial reporting into the class of users of ?nancial
information and the class of preparers of this information,
each with their own set of values, discourse and perspec-
tives which are brought to bear in seeking to debate and
in?uence proposed accounting standards, as opposed to
economic self interest which is more individually ori-
ented as is the regulator capture thesis. In turn, the ideol-
ogy or worldview of the user class, for example, is
enabling and restrictive in the sense that it does not just
serve to express its values, but also as a barrier for
accepting or even understanding the values of the pre-
parer class. Combining these literatures, it may be that
there exists a more general neo liberal ideology of market
based exchanges within which are found two classes of
worldview – users and preparers who support market
based exchanges, but who bring to bear differing values,
dialog and perspectives.
Perhaps the closest that the theoretical source of our in-
quiry, described in the next subsection, comes to broaching
the topic of regulatory capture has been termed the ‘‘old
institutionalism’’ (DiMaggio & Powell, 1991, pp. 11–15).
Here, Selznick (1949; see also 1957), for example, studied
the Tennessee Valley Authority whose purpose was to
serve the public by eliciting grass-roots involvement in
building dams and thereby prevent ?ooding, preserve for-
ested land, furnish assistance to primarily poor farmers,
generate electricity, and provide recreational opportunities
to the populace. However, Selznick found that the TVA was
overtly co-opted by powerful local and national interest
groups who strategically placed their representatives in
sensitive areas of the TVA to in?uence its policies, thereby
subverting the TVA’s overall mission and make money off
the program; in essence, Selznik found that the regulator
had become advocate of those to be regulated. Perrow
(1986, pp. 173–174, emphasis in original) offered an
appreciative critique of the old institutionalism that he
saw as a signi?cant failure of organizational theory in gen-
eral (ampli?ed by DiMaggio & Powell, 1991, pp. 11–15;
Meyer, 2008; and even by Selznick himself in 1996):
[T]he failure to see society as adaptive to organizations. A
view that organizations are protean in their ability to
shape society would direct us to the study of the pow-
erful organizations and to the public data gathered by
government agencies and congressional committees.
Here, we see the gravest defect of the [old] institutional
school in particular, for it has been the one most con-
cerned with the environment. That school’s view of orga-
nizations and society fails to connect the two. Parts of the
‘environment’ are seen as affecting organizations, but
the organization is not seen as de?ning, creating, and
shaping its environment.
As we shall see in the next subsection, empirically
establishing the connection between organizations and
society in their mutual constitution is precisely the focus
of more recent neo-institutional theory research concerned
with the processes of endogenization.
A neo-institutional theory perspective on the endogenization
of regulations
Institutional theorists have long recognized that such
higher levels of government as the federal government
are typically seen to be in positions of sovereign control
464 Z. Bozanic et al. / Accounting, Organizations and Society 37 (2012) 461–481
and exert coercive pressure on those regulated (Davis,
McAdam, Scott, & Zald, 2005; DiMaggio & Powell, 1983;
DiMaggio & Powell, 1991; Fligstein, 1991; Meyer & Rowan
1977; Vermeulen, Buch, & Greenwood, 2007). There is an
emerging body of research, however, that interprets insti-
tutionalization as an un?nished process that is profoundly
political in which those regulated play a prominent role in
in?uencing governmental regulations in order to shape
the ‘‘rules of the game’’ (DiMaggio, 1988; DiMaggio &
Powell, 1991; Powell, 1991; Scott, 2008; Suddaby, 2010).
On this theme, Oliver (1991) reasoned that one shortcom-
ing in institutional theory is its emphasis on conforming to
societal expectations. Instead, she proposed that organiza-
tional tactics may vary from conforming to resistant, from
passive to active, from preconscious to controlling, from
impotent to in?uential, and concluded that organizations
are likely to use more active tactics directed at modifying
the rules of the game in order to gain advantage when
institutional expectations are localized, weakly enforced
or ambiguous. As we shall see in the case of insider
trading regulations, however, these expectations were
expressed quite speci?cally (rather than ambiguously)
at the federal (rather than local) level, wherein a tighten-
ing and harmonization of enforcement was being
actively (rather than weakly) sought across all federal
jurisdictions.
Edelman (1990), Edelman (1992) and her colleagues
(Edelman et al., 2011; Edelman et al., 1999; Suchman &
Edelman, 1996; Edelman, Krieger, Eliason, Albiston, &
Mellema, 2011) saw as myopic the materialist perspec-
tive’s, as well as neo-institutional theory’s tendency to
treat regulation as ‘‘law on-the-books,’’ and as an ‘‘exoge-
nous’’ force, wherein authoritative rules are seen as con-
crete, determinative and able to coerce compliance on
the part of those regulated. Such a treatment ignores the
politics of ‘‘law in action,’’ wherein con?icting views over
the interpretation of regulations emerge (see also Louns-
bury & Rao, 2003), such that law takes form in and through
social interaction. Edelman et al. (1999, p. 407) suggested
that the meaning and force of laws and regulations may,
instead, be socially negotiated by regulators and those reg-
ulated, and offered a de?nition of rendering law as endog-
enous that is central to our work:
The construction of law is invariably contested: many
voices contribute to the process of legal enactment
and vie for favorable interpretations of law once it is
enacted. The more ambiguous and politically contested
the law, the more open it is to social construction. Law
regulating organizations is especially open to social
construction because corporate lobby is usually suc-
cessful in softening regulation that infringes on corpo-
rate interests, thus producing broad, vague mandates.
Under such conditions, organizations actively partici-
pate in constructing the meaning of compliance, and
this construction process generates ideologies of ratio-
nality [in our case, the neo liberal ideology of free and
open markets], which legitimate and reinforce particu-
lar compliance strategies. That organizations are both
responding to and constructing the law that regulates
them renders law ‘‘endogenous’’; the content and
meaning of law is determined within the social ?eld
that it is designed to regulate.
1
In contrast with the ‘‘materialist perspective’’ sketched
in the preceding subsection, Edelman and Suchman
(1997, pp. 479 and 497), reasoned that interpreting law
as endogenous rather than exogenous is generally consis-
tent with the ‘‘cultural perspective’’ which ‘‘portrays orga-
nizations as cultural rule followers and sees the law as a
system of moral principles, scripted roles and sacred sym-
bols.’’ Edelman et al. (2011, p. 891; see also Talesh, 2009)
observed that legal endogeneity theory does not contradict
the materialist perspective nor the regulatory capture per-
spective (e.g., Stigler, 1971) nor the older version of institu-
tional theory (e.g., Selznick, 1949), but ‘‘rather it extends
this work in that there is another, more subtle path
through which organizations in?uence law.’’ With Edel-
man and her colleagues’ work, as is true of our own study,
there is a shift of emphasis from this earlier literature to
probing covert as well as overt, and passive as well as ac-
tive in?uence attempts by classes of constituents con-
cerned with regulation in which focus is placed on the
role of ideology as opposed to the vested interests of indi-
viduals, and where an attempt is made to appreciate that
the institutional environment does indeed affect those reg-
ulated, and that those regulated have a role in de?ning, cre-
ating, and shaping that very environment (DiMaggio &
Powell, 1991, p. 11–15; Meyer, 2008; Selznick, 1996). Thus,
rather than seeking to eliminate theoretical perspectives,
our aim is on adding to the proliferation of theories that
may be usefully applied to unpack the complex dynamics
at play in shaping the regulatory milieu (see also Cooper
& Robson, 2006; O’Leary, 1985).
The research of Edelman and her colleagues proceeds by
probing the manner in which those regulated seek to in?u-
ence the laws and regulations that bind them after they
have been issued by seeking to in?uence legal de?nitions,
rhetoric, thinking, categories and logic used in court ver-
dicts over a span of time and in different locales, especially
if those regulations contain suf?cient ambiguity (see also
Edelman and Suchman, 1997; Lawrence & Suddaby,
2006; Suddaby, 2010). From this base, Edelman and Stry-
ker (2005, pp. 543–544) advocated probing the social
1
This de?nition contrasts with an orthodox, neo-classical economics-
based de?nition of endogenous. Based upon a Greek root of ‘‘proceeding
from within,’’ a concept is treated as endogenous if it is contained within a
model under investigation. More technically, within an econometric model,
a parameter or variable is said to be endogenous when there is a correlation
between it and an error term. Endogeneity can arise as a result of auto-
regression, measurement error, omitted variables, sample selection or
problems of simultaneity (c.f. Kennedy, 2008, p. 139). However, consistent
with orthodox treatments of regulation within the neo-institutional theory
perspective, albeit from a much different perspective, the accounting
literature has treated regulation of trade by insiders as an exogenous force.
Here, Huddart et al. (2007), for example, incorporate elements of the
regulatory framework as an exogenous constraint rather than as endoge-
nous. The focus of this work is on understanding the behavior of pro?t
maximizing agents who comply with a given set of regulations. Specifying
different rules in different economic contexts allows behavior and
outcomes to be compared across regulatory regimes; however, the roles
of agents in the process of moving from one regulatory regime to another,
or in the translation of regulatory requirements into rules of the economic
game, have not been modeled.
Z. Bozanic et al. / Accounting, Organizations and Society 37 (2012) 461–481 465
realms surrounding legal institutions to better understand
law as a broad set of formal rules, norms and symbols that
constitutes, and is constituted by, the economy in which
‘‘law is con?ictual, political, and deeply implicated in the
stabilization and transformation of power, including eco-
nomic power and control’’ (p. 534). Harmonious with the
criticism of the older version of institutional theory that
‘‘Parts of the ‘environment’ are seen as affecting organiza-
tions, but the organization is not seen as de?ning, creating,
and shaping its environment’’ (DiMaggio & Powell, 1991, p.
11), they theorized that:
While lawmay operate under some circumstances as an
exogenous shock to economic ?elds, law and legality
are more often both produced by and a product of eco-
nomic constructions. . . .Lawyers, judges, personnel pro-
fessionals, employers, and employees act as conduits of
institutionalized ideas, and as contestants in political
battles to shape the meaning of law in overlapping legal
and economic ?elds. It is therefore critical that eco-
nomic sociology treat law not as a force outside of the
socially embedded economy, but rather as a force
within, and a product of, that economy. Ordinarily, legal
and economic ?elds will be mutually endogenous,
through a reciprocal, causal dynamic that is, at once,
institutional and political. y incorporating a broader
notion of law as legality manifested in institutionalized
social ?elds overlapping with economic ?elds, we chal-
lenge the idea that economic rationality may be under-
stood apart from its law-related social construction (see
also Swedberg, 2005).
In a series of studies Edelman and her colleagues
(Edelman, 1990, 1992; Edelman, Erlanger, & Lande, 1993;
Edelman, Uggen, & Erlanger, 1999; Edelman et al., 2011)
found support for the general line of reasoning that the Ci-
vil Rights Act had become progressively in?uenced by
those regulated. But here, in Oliver’s (1991) terms, the
‘‘endogenization’’ of law was accomplished in a relatively
passive manner, as a broad class of social actors (e.g., HR
professionals) in effect negotiated the meaning of Equal
Employment Opportunity (EEO) after it had been enacted
(for related work, see also Dobbin & Sutton, 1998; Goodrick
& Salancik, 1996; Pedriana & Stryker, 1997; Sutton, 1996).
This line of research has been bolstered and updated by
Edelman et al. (2011), who found, in a content analysis of
the minutes of federal civil rights cases, that such organiza-
tional structures as grievance procedures, anti-harassment
policies, and formal hiring practices became symbolic indi-
cators of a defendant organization’s compliance with anti-
discrimination laws irrespective of their ef?cacy. A key in-
sight of this study was that the different courts developed
three distinctly different legal ‘‘theories’’ of discrimination
and corresponding forms of rhetoric in adjudicating the
cases before them: (1) disparate treatment theory, in
which employees were alleged to have been discriminated
against because of their membership in a protected class;
(2) disparate impact theory, in which a seemingly neutral
employment practice, like standardized testing, discrimi-
nates against a protected class; and (3) sexual harassment
theory, in which employees are sexually harassed by hier-
archical superiors or the organization exhibits a hostile
work environment for primarily women. Although these
three theories are not directly associated with our own re-
search focus, they suggest that insiders’ ‘‘knowing posses-
sion’’ vs. ‘‘use’’ vs. ‘‘possession providing a strong inference
of use’’ may be gainfully interpreted as distinctly different
legal theories or forms of rhetoric pertaining to regulating
insider trading that were differentially applied by courts
and wound their way into regulation (for further discus-
sion of the role of theorizing within institutionalization
processes, see Lawrence, 2006, pp. 226–227).
While Edelman (e.g., 2011, p. 893) focused on probing
‘‘the ways in which the legal rights of disenfranchised so-
cial groups are undermined by social processes’’, our work
probes the manner in which the legal rights of enfran-
chised and even super enfranchised social groups are ad-
vanced by regulatory processes. More subtly, perhaps,
while prior endogenization research examined how court
decisions were in?uenced from below by defendants who
symbolically display seemingly appropriate organizational
structures and processes, our work will in addition probe
efforts by the SEC to ‘‘harmonize’’ court decisions from
above to eliminate the ability to invoke the ‘‘use’’ as op-
posed to ‘‘possession’’ standard, and then proceeds to
examine how the SEC’s proposed insider regulation was
in?uenced from below as those regulated sought to loosen
its provisions. Moreover, while prior endogenization re-
search has focused on how in?uence is exerted relatively
passively on the interpretation of a regulation after it has
been issued, we will in addition study the active attempts
by those regulated to in?uence the codi?cation of a pro-
posed regulation before it is issued. On this point, Edelman
et al. (2011, p. 892) observed that ‘‘To the extent that the
laws that courts interpret are themselves subject to endog-
enous in?uences of corporate practices, legal endogeneity
may be even more powerful than what we document in
this article.’’ Moreover, whereas Edelman and her col-
leagues focused on how ambiguity in regulations may be
exploited by those regulated, we will build upon this key
insight to also probe how those regulated may actually
seek to also negotiate less ambiguity by advocating more
speci?city in regulatory provisions, thereby creating room
to maneuver within a regulatory framework. Our overall
focus is harmonious with Luke’s (2005, esp. ch. 1) ?rst
dimension of his three dimensional explanation of power
(we will consider his second and third dimensions in the
last section of our paper in which we explore the implica-
tions of our analysis). Within this dimension, power is
overtly exercised in which A exerts in?uence over B, such
as when open debate between the two on a policy issue
culminates in A’s interests prevailing. Concerning this ?rst
dimension of power, Cooper and Robson (2006, p. 426) ob-
served that accounting researchers ‘‘have gone too far in
neglecting to study the overt use of power in standard set-
ting,’’ although joined by Malsch and Gendron (2011, p.
458) and O’Leary (1985, pp. 89 and 93), they go onto urge
researchers to also consider more covert applications of
power such as framed by Luke’s second and third dimen-
sions; on this point, the older version of institutional the-
ory of Selznick (1949), with its emphasis of the overt
exercise of power, would be insensitive to these second
and third dimensions. Overall, extending the endogeniza-
466 Z. Bozanic et al. / Accounting, Organizations and Society 37 (2012) 461–481
tion line of reasoning in the manner we have outlined is
important because institutional theory research has
tended to problematize the formal distinction between
the regulation design period and the post regulation
enactment modi?cation period (DiMaggio & Powell,
1991; Scott, 2008; in counterpoint, Greenwood, Oliver,
Sahlin, & Suddaby, 2008, esp. 25–28, and Meyer, 2008
see this distinction as contentious and open to further re-
search scrutiny), such that exploring the former within
our study has the potential for further establishing the
robustness of the endogenization concept.
2
To date, there has been only limited application of neo-
institutional theory speci?cally to understanding the SEC
and ?nancial institutions. Bealing (1994) found in an
empirical study that a signi?cant portion of the SEC’s bud-
get was driven by the number and prominence of enforce-
ment actions it brought against regulatees, thus signaling
its conformity to Congressional expectations. Similarly,
Bealing, Dirsmith, and Fogarty (1996) examined the histor-
ical emergence of the SEC with the passage of the 1934
Securities and Exchange Act and found that this regulator
itself was subject to institutional pressures and had to seek
legitimacy in the eyes of not only Congress, but also regul-
atees in order to gain their support and survive. Hayward
and Boeker (1998) found that ?nancial analysts rate their
own clients’ securities more highly than wholly indepen-
dent analysts, but that this is mitigated by the professional
reputation of the analysts, which confers them power.
Westphal and Zajac found in two studies that the symbolic
display of actions bolstering corporate governance yielded
positive stock market reactions (1998), and that the sym-
bolic use of stock re-purchase programs by corporations
was mitigated by the power of the CEO over the board of
directors (2001). Lounsbury (2002) employed institutional
theory to examine the historical emergence of ?nance as a
professional ?eld. Meyer and Hollerer (2010) found that
the global spread of shareholder value is mitigated by na-
tional cultural and structural factors. Weber et al. (2009)
examined the in?uence of institutional pressures in the
formation of national stock exchanges in developing coun-
tries and found that international coercion, as well as
mimetic isomorphism (DiMaggio & Powell, 1983), in?u-
enced the properties of the resulting stock exchanges. Fi-
nally, Shapiro and Matson (2008) found that the public
accounting profession successfully resisted efforts by the
SEC to impose regulations pertaining to reporting on client
internal controls until the Enron and WorldCom debacles
and passage of the Sarbanes Oxley Act. These studies point
to the usefulness of neo-institutional theory to examining
issues related to the SEC and the stock market, but do
not broach the issue of endogenizing regulations, which
is the focus of our work.
In critiquing the accounting literature’s general use of
neo-institutional theory, and a more general neglect of
how rules may change over time within institutionalized
?elds, Lounsbury (2008, p. 356) observed that prior litera-
ture has tended to focus on micro processes of accounting
phenomena rather than broader institutional dynamics,
stating:
A more complete approach to practice that accounts for
institutional processes requires attention to the broader
cultural frameworks that are created by ?eld-level
actors, as well as the lower-level activities of organiza-
tions and other actors that articulate with those
frameworks. . . .[T]he power of a more comprehensive
approach becomes evident when probing the question
of where new practices come from – an important, yet
relatively unexplored question.
Consistent with Lounsbury’s position, we will direct our
research focus on examining the actions of both ‘‘lower le-
vel organizations and other actors’’ (the circuit courts and
those regulated) and a ‘‘?eld-level actor’’ (the SEC) as a
new insider trading regulation is developed.
Central research question
Our research addresses a single, overarching question:
What are the social dynamics by which those subject to
regulation seek to in?uence the institutional rules of the
game embedded in SEC insider trading regulations?
By addressing this central research question, our goal is
to provide descriptive evidence on the social dynamics by
which insider trading is in?uenced by those regulated. In
turn, the contribution to the endogenization thesis will
be established in our interpretation of the evidence
marshaled.
Research methods
We gathered evidence through latent and manifest con-
tent analyses of the archival material that punctuates the
history of insider trading regulation (Berg, 2004; for access
to rhetorical analyses within institutional theory, see Law-
rence, 2006, p. 239–240; Suddaby, 2010, p. 17). Archival
material subjected to latent content analysis took the form
of both public records (Denzin, 1978), as well as press cov-
erage of the events examined (e.g., Altheid, 1996; Gamson
& Modigliani, 1989; Kagan, 1994). Public material included
2
Extending Edelman et al.’s work, Kelly (2003) examined relatively
concrete tax law related to dependent care expense accounts and
employer-sponsored child care centers, and found that bene?ts consultants
apparently exploited ambiguity in the tax law through aggressive inter-
pretation. Similarly, Schneiberg and Soule (2005) examined fundamental
institutional change in the insurance industry between 1909 and 1930,
wherein those regulated themselves generated the conditions for change
through political action, thereby suggesting that regulation is a contested,
multi-level process. Vogel and Davis (2005) examined attempts by
shareholder activists (who opposed) and corporate managers (who sup-
ported) to in?uence state legislation designed to combat hostile takeovers
of corporations. They found that local economic crisis, existing state
infrastructure, and states’ prior anti-takeover statutes all conditioned
states’ rates of adopting legislation, the type of legislation adopted, and its
ef?cacy. Reversing this line of reasoning, Vermeulen, Buch, and Greenwood
(2007) found in a study of the Dutch concrete industry that a highly
institutionalized group of corporations and professional groups effectively
resisted innovations sought by their government, signaling that the power
of government to exert sovereign control may be exaggerated. We will
extend the work of Edelman and her colleagues, as well as Kelly, Schneiberg
and Soule, Vogel and Davis, and Vermeulen et al. by examining the overt
efforts of those regulated to ex ante in?uence the insider trading regulations
that are intended to constrain their actions.
Z. Bozanic et al. / Accounting, Organizations and Society 37 (2012) 461–481 467
U.S. Congressional legislation concerning the securities
markets (e.g., the Securities Act of 1933, the Securities Ex-
change Act of 1934, and the Insider Trading Sanctions Act
of 1984, and the Insider Trading and Securities Fraud
Enforcement Act of 1988) and corresponding SEC regula-
tions, particularly pertaining to insider trading, as well as
proposed new regulations and speeches by the SEC Chair,
the Chief Accountant, and the Commissioners. In particu-
lar, legal cases speci?cally identi?ed by the SEC as presag-
ing the need for recent insider trading regulation (see
Table 1) were subjected to detailed latent content analysis;
concerning this strategy, Tolbert (1992, p. 197) observed
that one manner in which limitations in general archival
analyses may be overcome within neo-institutional theory
is ‘‘through more in-depth historical analysis of a subset of
cases designed to supplement the analyses of the broader
patterns of change.’’ Press coverage included the Wall
Street Journal, Los Angeles Times, New York Times, etc., con-
cerning insider trading, political activity related to new
regulations issued during this era, and the resulting regula-
tions. Within latent content archival analysis, the research-
er serves as the primary research instrument (Altheid,
1996; Van Maanen, 1979, 1988; Strauss & Corbin, 1990).
According to Berg (2004, p. 107), such an analysis repre-
sents an ‘‘interpretive reading of the symbolismunderlying
the physically presented data,’’ and thus focuses on ‘‘the
deep structural meaning conveyed by the message.’’
Although there are dangers inherent in drawing inferences
from such symbolism, it is nevertheless a particularly po-
tent approach in examining archival material suggestive
of the expression of interest-based behavior (Merton,
1968, pp. 366–370). We mitigated these dangers by incor-
porating such independent, corroborative techniques as
using multiple sources, having researchers reach consen-
sus as to the interpretation of material, and including
detailed excerpts from the material examined to substanti-
ate the researchers’ interpretations (Berg, 2004). Also, the
use of manifest content analysis, described below, miti-
gates these dangers by incorporating a means for method-
ologically triangulating on the discourse pertaining to
insider trading regulation, thereby helping establish the
construct validity of our work (Campbell & Fiske, 1955;
in accounting, see Ashton, 1977).
Archival material subjected to manifest content analy-
sis included the letters of comment submitted to the SEC
pertaining to its proposed insider trading regulation (Rule
10b5-1, Regulation Selective Disclosure and Insider Trad-
ing, hereafter, SDIT); among these, in particular, we fo-
cused on examining the letters of comment that the SEC
self-reported as having in?uenced its deliberations, as
well as letters using similar key wording, but not cited
by the SEC as in?uential, and letters from credentialed ac-
tors. The manifest content analysis was performed using
the linguistic software package Linguistic Inquiry and
Word Count (LIWC; see Tausczik & Pennebaker, 2010, for
discussion of how LIWC was created and validated). LIWC
is word-count-based software that contains sets of lexica
known to be associated with emotional and cognitive pro-
cesses (‘‘attributes’’) embedded within speech. It matches
the words found within a given passage of text to those
associated with an attribute to provide the number of
attribute words (e.g., ‘‘positive’’ or ‘‘negative’’) as a fraction
of the total number of words found within a passage. We
examine the affective states revealed in the comment let-
ters across letter types, i.e., those letters cited by the SEC
in the ?nal rule, those containing certain keywords, and
by credential. LIWC is gaining prominence within the
scholarly accounting literature for analyzing text in a
number of areas, including ?nancial reporting (e.g., Li,
2008), forward looking statements (e.g., Li, 2010), and
conference calls (e.g., Larcker & Zakolyukina, 2012);
within ?nance, the ability of LIWC to tap negative and po-
sitive tonalities is consistent with, for example, Tetlock’s
(2007; see also Suddaby, 2010) more general ?nding that
the emotional content of analyst reports in?uenced the
trading of corporate shares. In addition to positive and
negative emotional attributes, and consistent with the
view that the response to institutional processes may be
emotional (e.g., Suddaby, 2010; Tetlock, 2007), we consid-
ered two additional forms of expressed negative states:
anxiety and anger. We then examined the affective states
revealed in the comment letters across letter types, i.e.,
those letters cited by the SEC as in?uencing the ?nal rule,
as well as letters containing key technical words (‘‘af?r-
mative defense,’’ ‘‘planned trade,’’ ‘‘safe harbor,’’ or ‘‘pos-
session vs. use’’), but were not cited by the SEC as
in?uencing its deliberations. Finally, we extend the pre-
ceding analysis to consider letters from credentialed
sources (e.g., associations, investment ?rms, law ?rms)
vs. non-credentialed sources to examine how the SEC
may have differentially responded to letters from in?uen-
tial actors. In order to examine the overall tone of the let-
ter, we create a summary measure, called net optimism
(see, for example, Bonsall, Bozanic, & Fischer, 2012; Henry,
2008; Rogers, Van Buskirk, & Zechman, 2011), which is de-
?ned as the number of positively emotive words less the
number of negatively emotive words, scaled by the total
number of words within a given comment letter. We rein-
force our manifest content analysis by providing excerpts
from comment letters possessing attribute levels at the
extremes to document the rhetorical strategies employed
in the letters that may have ultimately in?uenced the
SEC in its decision to provide insiders with a safe harbor
(Berg, 2004).
Prior research in accounting has, of course, subjected
correspondence submitted to such bodies as the FASB to
analysis via an applied economics perspective, unaided
by ethnographic content analysis packages directed at
teasing out more nuanced relationships, although none to
our knowledge have focused on letters submitted to the
SEC pertaining to the regulation of insider trading; more-
over, none have employed the endogenization strand of
institutional theory to motivate their examination. Con-
cerning this genre of research, Cooper and Robson (2006,
p. 424) observed that such a perspective is ‘‘. . . too re-
stricted in its conceptions of politics, too oriented to an
individualistic conception of society and politics, too
neglectful of the power of large organizations and groups,
and too partisan in its approach to deregulation,’’ and in-
stead recommended adoption of a ‘‘more constuctivist ap-
proach.’’ For example, advancing a positive theory of
accounting, Watts and Zimmerman (1978; for telling
468 Z. Bozanic et al. / Accounting, Organizations and Society 37 (2012) 461–481
critiques, see, for example, Lowe et al., 1983; Merino & Nei-
mark, 1982; O’Leary, 1985) examined company correspon-
dence submitted to the FASB concerning its discussion
memorandum on price level adjustments to ?nancial
statements. Generally theorizing that a company’s lobby-
ing position on a proposed accounting standard may be
predicted based upon its economic impact and manage-
ment’s economic motivations, they found that large ?rms
that experienced a reduction in net income under the pro-
posed standard favored the proposed standard, thereby
potentially averting increased governmental regulations,
while smaller companies opposed it if the cost of lobbying
was justi?ed by their increased bookkeeping costs. New-
man (1981) examined the relative in?uence of the SEC
on the organizational restructuring of various private sec-
tor boards (the APB and FASB) by constructing differing
‘‘power indices’’ and found that the SEC’s power increased
with each restructuring. Touching upon the regulator cap-
ture thesis (notably Stigler, 1971 discussed earlier), which
she termed the economics of regulation perspective, and
the agency theory perspective (esp. Watts & Zimmerman,
1978), Puro (1984) examined auditor lobbying behavior re-
lated to ?nancial reporting standards being developed by
the FASB in the form of examining comment letters sub-
mitted to the Board and classifying them as for, against
or neutral concerning a variety of Board exposure drafts.
She found that the regulator capture hypothesis better ex-
plained new forms of disclosure being required, while
agency theory better explained rules requiring standardi-
zation of accounting methods, suggesting that different is-
sues motivate systematically different behaviors on the
part of auditors. Kelly (1985) examined corporate manage-
ment’s decision to submit letters of comment to the FASB
concerning an exposure draft on foreign currency transac-
tions. She found that while the two primary variables
examined, debt covenants and management’s proportional
ownership, proved insigni?cant, companies submitting let-
ters opposing the standard were larger, had a greater
percentage of foreign sales and leverage, and, opposite of
what was hypothesized, lower management ownership.
McLeay, Ordelheide, and Young (2000), focused on the
transformation of the Fourth European Company Law
Directive into German accounting regulations, content
analyzed published commentaries of companies, auditors
and academics. They found that while industry lobby
groups representing reporting companies exerted the most
in?uence on resulting regulations, it was necessary for at
least one other lobby group to support its position in order
for it to exert a telling impact. Concerned with understand-
ing the general lack of participation by ?nancial statement
users in accounting standards promulgation processes,
Durocher, Fortin, and Cote (2007) sought to develop a
theory of user participation by blending a variety of theo-
retical perspectives to guide their interviews with two user
groups in Canada – ?nancial analysts and institutional
investors, to elicit their views of the standards setting
process. They found that participation and non-participa-
tion is driven by various forms of legitimacy attributed to
the standards setting process and intrinsic individual
motivation.
The endogenization of insider trading regulation
This section is organized into two subsections. The ?rst
presents the latent content analysis of historical events
surrounding the regulation of insider trading regulation.
The second presents the manifest content analysis of con-
temporary letters of comment submitted to the SEC per-
taining to a proposed updating of Rule 105b-1.
Re-negotiating insider trading regulations: historical origins
Insider trading was governed in the early 1900s primar-
ily through individual states’ corporate laws, and a number
of investigations isolated practices harmful to sharehold-
ers, including insider trading (e.g. U.S. Congress, 1913;
U.S. Congress House, 1900; Van Antwerp, 1913). The fed-
eral government became the dominant force within the
regulatory milieu after the stock market crash of 1929.
Subsequently, Congress passed the 1933 and 1934 Acts
to protect investors and assure the integrity of the securi-
ties markets (for discussion of stock markets and their reg-
ulation from a sociological perspective, see Stearns &
Mizruchi, 2005). The 1934 Act provides the foundation of
federal insider trade regulation by authorizing the Securi-
ties and Exchange Commission (SEC) to interpret federal
securities laws, amend existing rules governing securities
markets, propose new rules to address changing market
conditions, and enforce existing rules and laws (SEC,
2000b). However, the Act never actually made speci?ed
business activities illegal (i.e., it was not ‘‘self-executing,’’
nor was the term ‘‘insider’’ ever used; Bainbridge, 1999,
p. 25). Thus, the original 1934 Act had considerable ambi-
guity in its provisions. Moreover, March (1987, p. 154) ob-
served more generally that not only are such rule systems
marked by their ambiguity, but also con?ict of interests
among contending factions may become embedded in
their provisions such that ‘‘accounting standards are are-
nas of power and politics.’’ Indeed, in reviewing the rise
and impact of the 1933 and 1934 securities acts, Merino
and Neimark (1982, p. 34) observed that ‘‘We ?nd little
evidence to support the view that disclosure [coming
about as a result of the Acts] was expected to be useful
to individual investors, nor given its quality was it likely
to be useful in doing so. . .. The securities acts were not
so much acts of political enlightenment and reform, whose
primary purpose was to inform investors, but attempts to
maintain a status quo that has perpetuated the social unac-
countability of large corporations.’’
Rule 10b5 of the Securities and Exchange Act of 1934 is
the foundation of the current regulation, Rule 10b5-1,
which will be the focus of our analysis in the next subsec-
tion. Supreme Court Chief Justice William Rehnquist com-
mented in 1975, for example, that the pivotal Rule 10b5 is
‘‘a judicial oak which has grown from little more than a
legislative acorn’’ (Bainbridge, 2001, p. 12). Rule 10b5
makes it ‘‘unlawful for any person. . . to employ any device,
scheme, or arti?ce to defraud. . . or to engage in any act,
practice, or course of business which operates or would
operate as a fraud or deceit upon any person in connection
with the purchase or sale of any security’’ (SEC, 2000a). The
Z. Bozanic et al. / Accounting, Organizations and Society 37 (2012) 461–481 469
majority of legal claims against corporations and their
insiders fall within 10b5. Violations of the Securities Acts
can lead to either criminal liability (requiring the involve-
ment of the Department of Justice) or civil liability and
may arise from SEC actions or 10b5 class action law suits
initiated by third parties. The liability may apply to insid-
ers or the corporation under the ‘‘controlling person provi-
sion’’ (section 20 of the 1934 Act). Signi?cant case rulings
interpreting 10b5 did not appear until 1961, with case rul-
ings accelerating in the 1980s (Bainbridge, 2001, p. 12).
According to Karpoff, Lee, and Martin (2004), while the
SEC assessed $15.9 billion in ?nes against managers and
$8.4 billion against corporations from 1978 through
2002, the reputational penalties against these entities
may be as much as twelve times higher. Consequently,
the cost of not complying with the regulations is poten-
tially quite high.
De?nitions are crucial to the implementation of prohi-
bitions on insider trading: Which individuals and entities
are considered to be insiders? When is trading by an insi-
der improper? To answer the ?rst question, one class of
insiders, who are the focus of this study, are a company’s
of?cers. An answer to the second question remains elusive.
Three court rulings and Congressional acts have modi-
?ed the regulatory regime governing insider trading. In
United States v. Chiarella (1980; see Table 1 for synopsis;
for access to case law, see Westlaw, 2006), for example,
the Supreme Court ruled that insiders have the duty to
‘‘disclose material facts which are known to them by virtue
of their position, but which are not known to [the share-
holders] with whom they deal and which, if known, would
affect [the shareholders’] investment judgment. . . [or] to
forego [a purchase or sale] transaction.’’ Congress, in turn,
enacted the ITSA of 1984 to provide ‘‘increased sanctions
against insider trading in order to increase deterrence of
violations’’ (SEC, 2000b). ITSA allows the SEC to levy a civil
penalty up to three times the pro?ts gained or losses
avoided in transactions that are deemed illegal. The de?ni-
tion of insider trading, however, remained ambiguous. La-
ter, Congress passed the ITSFEA in 1988, which speci?es up
to 10 years imprisonment and increases criminal ?nes
from $100,000 to $1,000,000 for illegal trading activity.
Once more, insider trading escaped strict de?nition. Collec-
tively, these Congressional amendments to the original
1934 Act, however, endorsed SEC enforcement of federal
prohibitions of insider trading.
Beginning in 1998, and increasing in intensity through
2000, SEC Chairman Arthur Levitt stepped up efforts to
tighten regulations in the securities industry, as well as
?nancial reporting and auditing for publicly traded compa-
nies, in order to establish a ‘‘level playing ?eld’’ for inves-
tors (Levitt, 1998, 2000). According to the SEC (2000a),
the intent of the existing laws in 1998 was to enforce a
standard of ‘‘knowing possession’’ or ‘‘awareness’’ of inside
or private information: a company insider in possession of
information that is not publicly known and who trades
company stock is interpreted by the SEC as violating fed-
eral statutes. However, consistent with the thrust of Edel-
man et al.’s (1999) EEO study, the SEC (1999) observed in
its proposed rule on insider trading that ‘‘Neither we nor
Congress have expressly de?ned insider trading in a stat-
ute or rule. Instead, insider trading law has developed on
a case-by-case basis under the antifraud provisions of the
federal securities laws, primarily Section 10(b) of the Ex-
change Act and Rule 10b-5.’’ Although the Supreme Court
has variously described an insider’s violations as involving
trading ‘‘on’’ or ‘‘on the basis of’’ material nonpublic infor-
mation, the Court has not addressed whether ‘‘use’’ of such
information was necessary for trade to be improper, or
whether the lower standard of mere ‘‘possession’’ of such
information was suf?cient.
The SEC (1999, 2000a) stated that what precipitated its
proposal and ?nally adopted rule related to courts of ap-
peals’ cases that addressed the issue, but had reached
inconsistent results. The three speci?c courts of appeals’
cases cited by the SEC all recognized the practical dif?culty
of divorcing a trader’s ‘‘knowing possession,’’ or awareness
of inside information from its ‘‘use’’ in a trade (for discus-
sion of the exercise of regulatory discretion, see Spence,
1997). In United States v. Teicher (1993; see Table 1 for a
synopsis), the Second Circuit Court suggested that ‘‘know-
ing possession’’ was suf?cient to trigger liability for pre-
cisely this reason. In contrast, in SEC v. Adler (1998; see
Table 1), the Eleventh Circuit Court held that ‘‘use’’ was
the ultimate issue, but that proof of ‘‘possession’’ provides
a ‘‘strong inference’’ of ‘‘use’’ that suf?ces to establish a pri-
ma facie case. According to the Court,
The SEC argues that the district court erred as a matter
of law in granting summary judgment for Pegram in
[ÃÃ21] regard to his 1989 transactions in Comptronix
stock because, in concluding that Pegram’s preexisting
plan to sell stock rebutted any reasonable inference of
scienter created by the suspicious timing of his sales,
the district court improperly considered whether
Pegram used inside information in his trading. The
SEC argues that the district court incorrectly adopted
a causal connection standard for insider trading viola-
tions that allows a trader to avoid liability if the trader
proves that he did not purchase or sell securities
because of the material nonpublic information that
the trader knowingly possessed. The SEC argues that it
presented evidence that Pegram knowingly possessed
material nonpublic information, and thus Pegram, as a
corporate director, violated the prohibition against insi-
der trading found in § 10(b), Rule 10b-5, and § 17(a)
because, ‘‘whether or not Pegram used the inside infor-
mation,’’ Pegram traded in his company’s stock while in
possession of material nonpublic information.
Although it is fair to say that the Teicher court appeared
to look favorably [ÃÃ30] upon the SEC’s suggested test,
the court’s discussion was clearly dicta. The court
expressly found that it was ‘‘unnecessary to determine
whether proof of securities fraud requires a causal con-
nection.’’ Id. at 121. 25
In United States v. Smith (1998; see Table 1), the Ninth
Circuit Court rejected the Teicher ‘‘possession’’ test favored
by the SEC and instead, following precedent established in
SEC v. Adler, required that ‘‘use’’ must be proven in a crim-
inal case (for discussion of differing styles of enforcement
across courts, see Coglianese and Kagan, 2007, pp.
xvi–xx; May & Winter, 2007; Scholz & Wei, 2007).
470 Z. Bozanic et al. / Accounting, Organizations and Society 37 (2012) 461–481
Although few courts other than those cited above, have di-
rectly addressed the issue, a number of credible commen-
tators of the period expressed their views on the use vs.
possession debate, with the majority appearing to favor a
causal connection/use standard (CF. Horwich, 1997; Loss
& Seligman, 1989; Lowenfells & Bromberg, 1995).
Through con?icting circuit court verdicts, the ‘‘knowing
possession’’ standard favored by the SEC had been under-
mined. In direct response to the inconsistent application
of this standard in circuit courts and growing legal com-
mentary, the SEC sought to speci?cally tighten insider
trading regulations in order to establish less ambiguous
provisions (SEC, 2000a, pp. 22–23).
The SEC cannot, however, act unilaterally. Under the
federal Administrative Procedures Act, the SEC, like all fed-
eral regulators, is required to publish its proposals in the
Federal Register for notice and comment, with a required
comment response window of 90 days. Final rules are only
to be released after ‘‘due consideration’’ of the comments
received, and the ?nal rules usually detail some of the
SEC’s thoughts concerning the comments received—usu-
ally in footnotes to the ?nal release (for more general dis-
cussion of the effects of the Administrative Procedures Act,
see Coglianese, 2002; Croley, 2003; McCubbins, Noll, &
Weingast, 2007; Moe, 1990). In effect, the SEC is only re-
quired by law to open the possibility for being in?uenced
by regulatees.
On December 20, 1999, the SEC issued its proposed rule
on insider trading nested within the potentially more con-
troversial Selective Disclosure Rule to regulate disclosing
certain types of information to only narrowly de?ned
external constituents (perhaps to manage the comments
received, but also because some regulatees may have equa-
ted selective disclosure with insider trading; SEC, 2000a,
footnote 145). It may be anticipated that the response of
insiders to new regulations would be along two lines: (1)
insiders may seek reductions in the civil liabilities they
face when they trade company stock, or (2) insiders may
seek expansion of the circumstances in which they may
legally trade based on private information. In contrast with
Edelman and her colleagues’ work (e.g., Edelman, Uggen, &
Erlanger, 1999; Suchman & Edelman, 1996), that empha-
sized the role played by the ambiguity of a law, we will in-
stead interpret this second line of reasoning as seeking to
socially construct a more speci?c, albeit less stringent form
of regulation, by, for example, advocating ‘‘af?rmative
defenses’’ and ‘‘safe harbor’’ provisions within its
architecture.
Manifest content analysis of letters of comment:
contemporary dynamics
The SEC received several thousand comment letters on
the combined SDIT proposal (SEC, 2000a, p. 3). We ob-
tained the letters of comment, which are publicly available
for download from the SEC’s website, for our manifest con-
tent analysis. We employed the linguistic software package
Linguistic Inquiry and Word Count (LIWC) to conduct our
analysis. The results of the analysis can be found in Table 2.
In the ?rst two panels, four attributes are depicted: Posi-
tive, Negative, Anxiety and Anger. Panel A examines the
attributes across two categories, or letter types: those let-
ters cited by the SEC in its ?nal rule (Cited) and those non-
cited (Non-Cited). On the one hand, it may be the case that,
ex-ante, one would expect the SEC to only cite those letters
which were positive or supportive in their assessment of
the proposed rule. On the other, if the SEC was in?uenced
by parties contesting the rule and advocating, for example,
safe harbor provisions, the overall tone of the letters cited
may be negative. As depicted in Table 2, the results are
consistent with the latter expectation. On average, letters
cited appear to be less positive than those not cited, and
the difference is statistically signi?cant (À1.81, p-va-
lue = 0.00). Moreover, letters cited appear to be more neg-
ative than those not cited, with a statistically signi?cant
difference (0.39, p-value = 0.00).
In turn, the underlying Negative components—Anxiety
and Anger—appear to be the driving forces of negative let-
ters as both are more evident within letters cited by the
SEC. This ?nding is consistent with the SEC receiving and
citing letters not only contesting the proposed rule, but
also expressing duress as to the rule’s possible implications
for insiders and the protections it may or may not afford
them. In fact, as seen in excerpts from comment letters be-
low, substantial concern was voiced over possible in-
creased litigation risk stemming from application of the
broader ‘‘possession’’ standard and overly narrow de?ni-
tions of ‘‘safe harbor.’’
Panel B examines the attributes across two additional
letter types: those letters found to contain certain key
technical words (Keywords), noted above, and those which
do not (Non-Keywords). The results in Panel B are qualita-
tively similar to those in Panel A.
In Panel C, we bolster the preceding analysis by com-
paring credentialed (e.g., associations, investment ?rms,
law ?rms) sources to non-credentialed (i.e., individuals)
sources. Consistent with the endogenization hypothesis,
we ?nd that the credentialed letters cited by the SEC are
slightly less net optimistic than non-credentialed letters
(1.61 vs. 1.73). Turning to the letters not cited, we ?nd that
credentialed letters are again more pessimistic than non-
credentialed letters (1.68 vs. 3.88), and both types of cited
letters are more pessimistic than their non-cited counter-
part. Finally, and most importantly, inspecting the diago-
nals (Cited and Credentialed vs. Non-Cited and Non-
Credentialed), the difference is stark at À2.27 (p-va-
lue = 0.00), which provides further evidence in support of
the notion that the SEC chose to cite the more negative
(more pessimistic) letters received from credentialed
actors.
The last panel of Table 2, Panel D, presents the number
of comment letters by credential and tone. Letters are clas-
si?ed as possessing positive (negative) tone if they are
above (below) the sample median for net optimism.
Although the number of positive vs. negative letters (664
vs. 605) received from non-credentialed sources is similar,
the same cannot be said of positive vs. negative letters (4
vs. 63) received from credentialed actors. Building on Panel
C’s ?ndings, Panel D provides further evidence in support
of the endogenization hypothesis: while the vast majority
of letters are received from non-credentialed sources, let-
ters from credentialed actors are typically negative, and
Z. Bozanic et al. / Accounting, Organizations and Society 37 (2012) 461–481 471
these negative letters are the letters the SEC overwhelm-
ingly cites. As a percentage of the number of letters cited,
78% are from credentialed actors voicing a negative tone
on the SDIT proposal.
3
Next, we examined comment letters possessing attri-
bute levels at the extremes to ascertain the rhetorical strat-
egies employed. For example, what is being voiced in
letters cited (not cited) which exhibit high levels of posi-
tive or negative affect? Or, what is being voiced in letters
containing keywords (or lack keywords) with high levels
of positive or negative affect? First, for letters not cited,
as well as for letters not containing keywords, the com-
ments were generally from individuals and fairly sparse
in terms of the length of communication, regardless of pos-
sessing positive or negative affect. A comparison of letters
cited with those containing keywords revealed signi?cant
overlap: nearly 60% of letters containing keywords were
also letters found to have been cited. It begs the question,
then, as to why were there letters containing certain, stra-
tegic keywords not cited by the SEC? It may be that, in the
absence of these key technical words, the letters may have
been considered to possess little substantive content.
However, if possessing these key technical words, which
reference concepts critical to reducing insiders’ legal liabil-
ity, one might expect heightened SEC attention. Inspection
of non-cited, keyword letters revealed either letters were
submitted by individuals not stating explicit credible af?l-
iations (e.g., submitting on behalf of an association, law
?rm, or investment ?rm), or letters submitted from an
individual with a credible af?liation, though containing
content largely redundant with another letter cited. There-
fore, the ?nal comparison made is between letters cited
possessing high levels of positive or negative affect. Per-
haps ironically, positive letters supporting the proposed
regulation that were not cited by the SEC as having in?u-
enced its deliberations were submitted from small, indi-
vidual investors in support of SDIT as originally proposed
– the intended bene?ciaries of the regulation. At the other
end of the spectrum, negative letters were submitted from
associations and law ?rms explicitly or implicitly voicing
opposition to the proposal before it was amended to incor-
porate additional safe harbor and broader af?rmative de-
fense protections, in addition to advocating the stricter
‘‘use’’ standard. Thus, it appears that the SEC was more
responsive to those to be regulated by the new insider
trading regulation than those whom this regulation was in-
tended to protect from trading abuse.
Table 2
Manifest Content Analysis of Comment Letters Submitted to the SEC on the Selective Disclosure and Insider Trading (SDIT) Proposal. The mean percentage of
words (as a fraction of total word count) contained within SEC comment letters by attribute and comment letter type. The linguistic attributes, which are meant
to capture the affective states of the writer, are derived using wordlists from a common linguistic software package, LIWC. The attributes can be interpreted as
the mean number of pre-de?ned words contained in a comment letter as a percentage of the total number of words contained in the letter across letter types. In
Panel A, letter types are broken into those letters cited by the SEC in the Final Rule and those which are not. In Panel B, letter types are broken into those letters
containing keywords and those which do not. The keywords are de?ned as follows: ‘‘af?rmative defense,’’ ‘‘planned trade,’’ ‘‘safe harbor,’’ or ‘‘possession vs.
use.’’ In Panel C, we create a summary measure, called net optimism, which is de?ned as the mean percentage of positively emotive words less the number of
negatively emotive words (as a fraction of total word count). Here, letter types are divided into both those cited and non-cited and those considered to be from
credentialed sources (e.g., associations, investment ?rms, law ?rms). Lastly, Panel D presents the number of comment letters by credential and tone. Letters are
classi?ed as possessing positive (negative) tone if they are above (below) the sample median for net optimism. The number of letters cited by the SEC are
provided in parentheses.
Panel A: Comment letters cited by the SEC in the ?nal rule Panel B: Comment letters containing keywords
Attribute Letter type Attribute Letter type
Cited Non-cited Difference Keywords Non-keywords Difference
Positive emotion 2.63 4.44 À1.81
***
Positive Emotion 2.53 4.42 À1.90
***
Negative emotion 1.00 0.61 0.39
***
Negative Emotion 1.10 0.61 0.48
***
Anxiety 0.18 0.08 0.10
**
Anxiety 0.19 0.08 0.12
**
Anger 0.27 0.15 0.12
*
Anger 0.36 0.15 0.21
***
N 49 1287 N 36 1300
Panel C: Net optimism of comment letters Panel D: Count of comment letters
Letter type Letter type
Credentialed Non-
credentialed
Difference Credentialed Non-
Credentialed
Cited 1.61 1.73 À0.12
*
Positive
Letters
4 664
Non-Cited 1.68 3.88 À2.20
***
# Cited by
SEC
(2) (1)
Negative
Letters
63 605
Diagonal Difference (Cited and Credentialed vs. Non-Cited
and Non-Credentialed)
À2.27
***
# Cited by
SEC
(38) (8)
*
Represents statistical signi?cance at the 10% level.
**
Represents statistical signi?cance at the 5% level.
****
Represents statistical signi?cance at the 1% level.
3
The inferences we draw remain unchanged by the use of alternate
corpora for computing net optimism. Further, whether we assume the
variances across partitions to be equal or unequal (i.e., pooled or
Satterthwaite), the robustness of our statistical tests are unaffected.
472 Z. Bozanic et al. / Accounting, Organizations and Society 37 (2012) 461–481
Illustrative letters that exhibit an overall positive affect
include the following excerpts:
I hope that you will consider every protest from the
privileged elite as con?rmation of the necessity of Reg-
ulation FD. The privileged insiders will protest their lack
of special access to companies. The louder they com-
plain the more obvious that Regulation FD is a step for-
ward in improving the fairness and integrity of US
securities markets. (Stephen Jones, individual)
I have lost signi?cant amounts of money because I was
not privy to information that was given to ‘‘selected’’
parties before being publicly announced. (Malcolm Kir-
by, individual)
Illustrative letters that exhibit an overall negative af-
fect—anger and anxiety—include the following excerpts:
Our comments regarding proposed Rule 10b5-1 can be
summarized as follows: (1) the ‘‘af?rmative defenses’’
enumerated in Rule 10b5-1(c)(1)(i) should instead cre-
ate a rebuttable presumption under certain circum-
stances that the individual did not trade on the basis
of inside information. . .. (The Securities Litigation
Group of Brobeck, Phleger and Harrison LLP, law ?rm)
. . . The af?rmative defenses need to be broadened and
clari?ed in some respects to address additional situa-
tions where an investor should be permitted an oppor-
tunity to demonstrate that possession of inside
information was not a factor in his or her investment
decision. (The Securities Industry Association)
. . . Rule 10b5-1 is unnecessarily and impracticably
over-broad in proposing to make liability attach when
a trader is merely ‘‘aware of’’ material non-public infor-
mation, regardless of whether the information is used
or availed of in some manner, and in specifying only
four limited and incomplete af?rmative defenses to
the proposed general rule. In particular, we are con-
cerned that the introduction of a new standard of
‘‘awareness,’’ rather than ‘‘knowing possession’’ or
‘‘use,’’ as under the current case law, will create as
much, if not more, confusion and litigation as the Com-
mission is seeking to avoid by the proposed adoption of
Rule 10b5-1. We also believe that the proposed ‘‘af?r-
mative defenses,’’ in addition to being too narrowly
drafted, in some cases evidence unwarranted hostility
to normal, and undeniably innocent, business practices.
(The Association of the Bar of the City of New York)
We also believe that the Commission has not, in the
Proposing Release, made a persuasive case that the rule
it proposes is the most desirable of the possible alterna-
tives - including the alternatives adopted by the most
recent Court of Appeals decisions on this point. In par-
ticular, we believe the Commission has failed to explain
why its proposed rule of ‘‘awareness-plus-four-af?rma-
tive-defenses’’ is superior to the test adopted by the
Adler court, i.e., ‘‘’use’ with a strong inference of use
from ‘possession,’’’ which the Commission implicitly
rejects. We believe that the Commission would be bet-
ter advised either to adopt the Adler formulation or to
let the case law develop further in this area before
attempting to codify the law by rule-making, especially
where the Commission’s authority to do so may be
regarded as questionable and where the signi?cance
of the bene?t sought to be attained by the rule - clarify-
ing an ‘‘unsettled issue in [the law of] insider trading’’ –
is itself uncertain. (The Association of the Bar of the City
of New York)
After considering the letters of comment, the SEC re-
leased Rule 10b5-1, Selective Disclosure and Insider Trad-
ing, effective October 23, 2000. The Rule speci?cally
made trading while in possession of material nonpublic
information illegal across all jurisdictions. The ?nal rule,
however, was less stringent than the original proposal,
although it remained ?rm on the basic issue of ‘‘posses-
sion’’ vs. ‘‘use:’’
As discussed more fully in the Proposing Release, in our
view, the goals of insider trading prohibitions—protect-
ing investors and the integrity of securities markets—
are best accomplished by a standard closer to the
‘‘knowing possession’’ standard than to the ‘‘use’’ stan-
dard. At the same time, we recognize that an absolute
standard based on knowing possession, or awareness,
could be overbroad in some respects. The new rule
attempts to balance these considerations by means of
a general rule based on ‘‘awareness’’ of the material
nonpublic information, with several carefully enumer-
ated af?rmative defenses. This approach will better
enable insiders and issuers to conduct themselves in
accordance with the law.
While many of the commenters on Rule 10b5-1 sup-
ported our goals of providing greater clarity in the area
of insider trading law, some suggested alternative
approaches to achieving these goals. In that regard, a
common comment was that the rule should not rely
on exclusive af?rmative defenses. Commenters sug-
gested that we should either re-designate the af?rma-
tive defenses as non-exclusive safe harbors or add a
catch-all defense to allow a defendant to show that he
or she did not use the information.
We believe the approach we proposed is appropriate. In
our view, adding a catch-all defense or re-designating
the af?rmative defenses as non-exclusive safe harbors-
would effectively negate the clarity and certainty that
the rule attempts to provide. Because we believe that
an awareness standard better serves the goals of insider
trading law, the rule as adopted employs an awareness
standard with carefully enumerated af?rmative
defenses. As discussed below, however, we have some-
what modi?ed these defenses in response to comments
that they were too narrow or rigid, and that additional
ones were necessary. (SEC, 2000a)
The SEC speci?cally stated in its ?nal rule that it had in-
deed been in?uenced by the comments received from
regulatees:
The proposed af?rmative defenses generated a substan-
tial number of comments. Some commenters suggested
that the af?rmative defenses in the Proposing Release
were too restrictive, or that additional defenses were
needed to protect various common trading mecha-
nisms, such as issuer repurchase programs and
Z. Bozanic et al. / Accounting, Organizations and Society 37 (2012) 461–481 473
employee bene?t plans. Some of these commenters
noted that the requirement that a trader specify prices,
amounts, and dates of purchases or sales pursuant to
binding contracts, instructions, or written plans left
some common, legitimate trading mechanisms outside
the protection of the proposed af?rmative defenses.
Additionally, some commenters questioned the Propos-
ing Release’s exclusion of a price limit from the de?ni-
tion of a speci?ed ‘‘price.’’
In consideration of these comments, we are revising the
af?rmative defense that allows purchases and sales
pursuant to contracts, instructions, and plans. The
revised language responds to commenters’ concerns
by providing appropriate ?exibility to persons who
wish to structure securities trading plans and strategies
when they are not aware of material nonpublic infor-
mation, and do not exercise any in?uence over the
transaction once they do become aware of such infor-
mation. (SEC, 2000a, emphasis added).
As revealed in the footnotes to Rule 10b5-1, and corrob-
orated by our manifest content analysis depicted in Table 2,
the two groups whose comments the SEC most closely at-
tended to were apparently connected to the legal profes-
sion (e.g., bar associations) and the securities and
investment industry. These groups are generally seen to
have interests that align with those of corporate executives
(e.g., investment houses make money off executive trades)
so they may be expected to support corporate executives’
objectives (Bainbridge, 2001; Mizruchi, 1992). Consistent
with Oliver (1991; see also Friedland & Alford, 1991; Scott,
2008; Stryker, 2000), regulatees had effectively in?uenced
insider trading regulations by re-de?ning trades which are
permissible, thereby inducing more ‘‘play’’ in 10b5-1 pro-
visions via the creation of ‘‘af?rmative defenses’’ (see also
Kelson & Allen, 2004; Yackee, 2006). They were also able
to broaden the set of contracts that fell within the ambit
of the af?rmative defenses by convincing the SEC to broad-
en the de?nition of a ‘‘planned trade.’’ Even more play
would have been introduced had the defenses been made
non-exclusive, but the regulatees were not successful on
this front (see Burstein and Linton, 2002 for a general
discussion).
In sum, the revised Rule 10b5-1 provides an af?rmative
defense against litigation, or ‘‘safe harbor,’’ to insiders who
preplan trades at a time when they purport to not possess
material nonpublic information. This safe harbor does not
prevent a party from initiating a lawsuit against insiders,
but it does provide insiders a defense ‘‘which, if found to
be credible, will negate criminal or civil liability, even if
it is proven that the defendant committed the alleged acts’’
(SEC, 2000a). To qualify for the af?rmative defense, insid-
ers must: (1) enter into an irrevocable and explicit contract
to purchase or sell ?rm securities; (2) transfer trade execu-
tion authority to an uninformed third party (for example, a
broker); or (3) provide an uninformed broker an explicit
written algorithm for trade execution (this defense tends
to dominate in practice). Moreover, the Rule expressly pro-
hibits insiders’ from subsequently in?uencing the execu-
tion of planned trades. Insiders may selectively terminate
their plans before they are scheduled to expire or selec-
tively execute additional trades outside of their plans;
however, these acts may not enjoy the Rule’s legal
protection.
4,5
Implications
Consistent with an emerging body of institutional the-
ory research (e.g., Edelman et al., 1999; 2011; Edelman
and Suchman, 1997; Edelman & Stryker, 2005; Oliver,
1991; Scott, 2008; Suddaby, 2010), and in answer to our
central research question, our qualitative and quantitative
descriptive evidence suggests that various provisions with-
in the SEC’s insider trading regulations were effectively
and iteratively in?uenced by those regulated in multiple
waves. By implication, Rule 10b5-1 effectively became
endogenized. Although it was authorized by the 1934
Securities and Exchange Act to interpret federal securities
laws, amend existing rules governing securities markets,
propose new rules to address changing market conditions,
and enforce existing rules and laws (SEC, 2000a), the Act it-
self was not ‘‘self-executing,’’ and it never made such busi-
ness activities as insider trading speci?cally illegal
(Bainbridge, 1999, p. 25). As revealed in our latent content
analysis of cases speci?cally identi?ed by the SEC in moti-
vating it to propose a new regulation (see Table 1), the
4
Efforts to increase the ‘‘play’’ within 10b5-1 provisions did not subside
with the new rule’s issuance, however, since the act of entering into
planned trades may not be transparent, given that the SEC allows
companies to choose who participates within the 10b-5 planned trades,
and whether participation is disclosed. In most companies, the board of
directors chooses whether to amend insider trade policy to allow 10b5-1
trading; in such situations, companies generally delegate the decision of
whether to trade within 10b5-1 to the insider. The strategy of including
footnotes to the related Form 4 ?lings to the effect that trades are made
pursuant to 10b5-1 plans, but not disclosing the speci?c algorithm that
governs trades, has been sagaciously recommended by some lawyers
because it complicates the plaintiff’s task in ?ling a 10b5 class action
(Jagolinzer, 2009). In response, the SEC proposed in April 2002 mandating
disclosure on Form 8-K of insiders’ enrollment in 10b5-1 trading plans, and
also considered mandating disclosure of 10b5-1 participation for trades
that are executed pursuant to these plans (SEC, 2002). These more stringent
proposals, however, have been tabled inde?nitely. Some companies,
however, have chosen to voluntarily disclose participation in 10b5-1
trading programs.
5
Cooper and Robson (2006, pp. 427–428) observed that it is indeed a
heroic assumption that regulations effectively constrain management
action, that it is necessary to probe the constitutive roles of implementation
and interpretation. Although beyond the scope of the current paper, an
empirical investigation we conducted provided evidence in support of the
argument that insiders may be securing the legal protection of safe harbor
through invoking af?rmative defenses provided by planned trades in order
to circumvent the spirit of the Rule and thereby generate abnormal pro?ts.
Our empirical ?ndings reveal a signi?cant increase in insider stock sales
after Rule 10b5-1 became effective, i.e., insiders who invoke Rule 10b5-1
sell more stock and sell more often than they did before the rule became
effective. Further, we found that 10b5-1 participants executed a dispro-
portionate fraction of their sales in advance of bad news relative to non-
participants. The latter ?nding is consistent with the interpretation that
Rule 10b5-1 effectively relaxed trade constraints driven by perceived
litigation risk before ?rms’ news releases and that some insiders took
advantage of this condition (interested readers may contact the ?rst author
for more detailed discussion of our empirical ?ndings). These results tend
to support Merino and Neimark’s (1982) position that the 1933 and 1934
securities acts, and in our case the amended 10b5-1 provision, tend to
maintain the status quo in that the market model is reaf?rmed without
effecting substantive regulatory change.
474 Z. Bozanic et al. / Accounting, Organizations and Society 37 (2012) 461–481
federal circuit courts differentially applied what seemed at
the time ambiguous standards to gauge insider trading,
yielding inconsistent verdicts. On this theme, Scott
(2008; see also Friedland & Alford, 1991; Goodrick & Sala-
ncik, 1996) reasoned, for example, that social actors seek to
exploit inherent defects in the logic of regulations and re-
direct key de?nitions to serve their own interests. Consis-
tent with Edelman et al.’s (1999, p. 427, 2011) position that
laws may not serve as ‘‘articulate mandates,’’ applicable
provisions were differentially interpreted after they were
issued in case law across various circuit courts which dif-
fered in key de?nitions applied: from the ‘‘possession’’
standard favored by the SEC (United States v. Teicher,
1993); to a hybrid de?nition indicating that an actual
‘‘use’’ standard favorable to defendants was the ultimate
standard, but that ‘‘possession’’ provides strong inference
of improper insider trading (SEC v. Adler, 1998); to a
straight ‘‘use’’ standard (United States v. Smith, 1998;
SEC, 1999, 2000a). By implication, consistent with the
endogenization thesis, this ambiguity in key provisions in
existing regulations related to insider trading made it pos-
sible for alleged miscreants to escape prosecution in some
courts despite the SEC’s stated position that the ‘‘in know-
ing possession’’ standard should be enforced (SEC, 2000a,
p. 23).
The SEC, in turn, apparently recognized that its regula-
tory intent of enforcing a ‘‘knowing possession’’ standard
was being undermined (SEC, 1999, 2000a) and its goal of
fostering a ‘‘level playing ?eld’’ (Levitt, 1998) thwarted;
by implication, it recognized that existing regulations were
being endogenized. In an effort to harmonize standards ap-
plied across courts, improve their ‘‘clarity and certainty’’
(2000a, p. 25), and increase the stringency of provisions
applied, the SEC proceeded to further delineate the ‘‘in
knowing possession’’ standard within a proposed amend-
ment to Section 10b5 of the 1934 Act to be applied across
all jurisdictions, making it illegal for insiders to trade stock
if they merely knew of sensitive information (SEC, 1999).
Consistent with the Administrative Procedures Act, the
SEC received several thousand letters of comment on the
combined SEC (1999) that we subjected to manifest con-
tent analysis. By so doing, we were able to respond to Edel-
man et al.’s (2011, p. 892) observation that the laws
interpreted by courts may themselves be in?uenced by
those regulated, and that this dynamic may be a powerful,
albeit unexamined form of endogenization.
In particular, we focused on examining letters categor-
ically cited by the SEC as having in?uenced its delibera-
tions – those outright opposed the possession standard in
favor of the use standard (see Table 2, Panel A, ‘‘Cited Let-
ters;’’ SEC, 2000a; see Yackee, 2006, for discussion of
emphasizing such communications). We also examined
those letters broaching similar themes but not cited by
the SEC as in?uencing its decision, as well as letters not ci-
ted and not broaching these themes (Panels B–D). Concern-
ing the authors of the former letters primarily submitted
by the broad class of what Laughlin and Puxty (1983) label
as ‘‘information preparers,’’ during the period in which the
SEC sought to counter efforts to in?uence its regulatory in-
tent with respect to applying the ‘‘knowing possession’’
standard, and extending prior work by Edelman and her
colleagues (1999, 2011), we see in?uence attempts exerted
by regulatees before the regulation was ?nalized to allow
them more room to maneuver and escape prosecution for
improper behavior by in?uencing the key de?nition of ‘‘in-
sider trading’’ (Scott, 2008; Stryker, 2000). In additional
analyses (Panel C), we also found that the letters submitted
by credentialed parties (again, primarily ‘‘preparers’’) who
opposed the possession standard and/or favored provisions
limiting their legal exposure – safe harbor and af?rmative
defenses – had signi?cantly more in?uence on the ?nal
outcome than letters from non-credentialed parties, pri-
marily authored by a broad class of what Laughlin and
Puxty (1983; see also Cooper & Robson, 2006) refer to as
‘‘information users’’ favoring the original, stricter SEC pro-
posal. Fortifying these ?ndings, the results depicted in Pa-
nel D suggest that while the vast majority of letters were
received from non-credentialed sources, letters from cre-
dentialed actors were typically negative, and these nega-
tive letters were the letters the SEC overwhelmingly cited
(by a margin of 78%) as having in?uenced its deliberations.
These ?ndings are harmonious with Luke’s (2005, chap. 1)
?rst dimension of power in that the policy preferences of
regulatees prevailed over those who would bene?t from
the regulation, thus responding to Cooper and Robson’s
(2006, p. 426) call for research probing the overt applica-
tion of power in the policy formation process.
More generally, extending the extant institutional the-
ory literature dealing with endogenization, the relatively
passive, narrowly developed efforts of defendants directed
at favorably in?uencing speci?c Circuit Court verdicts for
violating regulations after they were issued became much
more active (Oliver, 1991), as those more generally regu-
lated also sought to in?uence the rules of the game that
were to contain them by before they were issued (Law-
rence, 2006; Scott, 2008: Suddaby, 2010). In contrast with
existing endogenization research (e.g., Edelman et al.,
1999, 2011), as revealed by our manifest content analysis,
the SEC sought to render the regulation less ambiguous
with regard to applying the ‘‘in knowing possession’’ stan-
dard. Moreover, those regulated then sought to in?uence
the SEC proposal to also make it more speci?c with respect
to including ‘‘safe harbor’’ provisions and broader ‘‘af?rma-
tive defenses.’’ Thus, depending on the context, regulatees
may at times prefer ambiguity as also found by Edelman
and her colleagues, and at times a stricter speci?cation of
provisions in regulations if it provided those regulated
with more room to maneuver. Consequently, the regula-
tory regime applied to insider trading should not be char-
acterized as fully endogenous (Edelman et al., 1999), but
rather as the more nuanced characterization of being
‘‘mutually endogenous’’ (Edelman & Stryker, 2005), as both
the regulator and regulatees came away from the process
with something they prized: the SEC had codi?ed the
‘‘knowing possession’’ standard and regulatees had ob-
tained room to maneuver within the new regulation. It
consequently appears that the institutional environment
does indeed affect those regulated, and that those regu-
lated play an active role in de?ning, creating, and shaping
that very environment (DiMaggio & Powell, 1991, p. 11–
15; Meyer, 2008; Selznik, 1996). Therefore, in marked con-
trast with Oliver’s (1991; see also Davis, McAdam, Scott, &
Z. Bozanic et al. / Accounting, Organizations and Society 37 (2012) 461–481 475
Zald, 2005) proposition that the tactics of regulatees may
vary from conforming to resistant, from passive to active,
from preconscious to controlling, from impotent to in?u-
ential, and that regulatees are likely to use the more active
tactics directed at modifying the rules of the game in order
to gain advantage when institutional expectations are
localized, weakly enforced or ambiguous, our results sug-
gest that in the case of recent efforts to regulate insider
trading, institutional expectations were expressed quite
speci?cally (rather than ambiguously) at the federal
(rather than local) level, wherein a tightening and harmo-
nization of enforcement were being actively (rather than
weakly) sought across all federal jurisdictions, and still
those regulated were able to effectively in?uence the reg-
ulations that were to contain them.
While we conclude that the relatively subtle endogeni-
zation line of inquiry established by Edelman and her
colleagues is compelling and potentially useful to a wide
range of issues of interest to accounting scholars, we
remain theory agnostics, and we concur with Edelman
et al. (2011) that the endogenization thesis does not con-
tradict, but rather extends alternative perspectives, as well
as with Greenwood et al. (2008), for example, who call for
multiple theoretical perspectives being applied to better
understand processes of institutionalization. We believe
that not only should accounting scholars empirically
examine the possible continuing presence of insider trad-
ing as shaped by existing regulatory grids within the ortho-
dox tradition sketched in our introduction, but also that
research should be pushed backwardly to probe the ex-
ante in?uence of those regulated on the regulations that
are to constrain their behavior by examining the full ‘‘reg-
ister’’ of regulatee action strategies. For example, both the
‘‘older’’ institutional theory perspective of Selznick (1949),
Selznick (1957) and regulatory capture (Stigler, 1971)
suggest that more active, direct and political in?uence at-
tempts, including lobbying, supplying and hiring regulator
staff, inducing budgetary pressure, and shaping judicial
outcomes through amicus participation, can also impact
the actions of regulators. Here, the endogenization thesis
may inform these alternative theoretical perspectives
thereby suggesting that these theories may be used symbi-
otically to explore regulation. Supportive of this point, a
preliminary examination we conducted revealed that the
era during which SDIT was being developed was an elec-
tion year that was marked by a spike in campaign contri-
butions to George W. Bush, members of the House
Commerce Committee, and members of the Senate Bank-
ing Committee (both of which exert SEC oversight) from
the securities industry, which dominated contributions
from other industries (Center for Responsive Politics,
2000a,b; for related scholarly literature, see Dwyer &
Roberts, 2004; Mizruchi, 1992; Poole & Daniels, 1985;
Thornburg & Roberts, 2008). Concurrent with these contri-
butions, the press predicted the end of Levitt’s reign as SEC
Chair because of his advocacy of stricter regulations, com-
mented on a threatened reduction in the SEC’s budget, and
reported on the appointment of a new Chair with a ‘‘kinder
and gentler’’ regulatory stance toward the business com-
munity – Harvey Pitt who had previously served as an
advocate for the ?nancial reporting community by acting
as the attorney for the AICPA and Big 5 ?rms (WSJ,
2002a,b; for illustrative recent press coverage, see WSJ,
2011).
6
We conclude that future research may be meaning-
fully directed at probing the harder as well as softer edge
processes by which those regulated seek to in?uence the ac-
tions of regulators.
We also believe that the full ‘‘register’’ of the SEC’s
‘‘voice’’ should be subjected to research scrutiny. While
our study focused on the efforts of the SEC to formally de-
velop a new rule on insider trading, such regulators as the
SEC do have other options that may be strategically de-
ployed which do not entail directly considering regulatee
comments. We urge future research probing efforts by
the SEC to strategically avoid endogenization by selectively
applying a range of prerogatives, such as: selective, differ-
ential enforcement (see O’Brien, 2007, for further guid-
ance); taking adjudication action against speci?cally
named parties rather than a category of parties; developing
and applying non-binding as opposed to legislative rules;
expressing general statements of policy; issuing interpre-
tive rules, which do not alter legal rights, but express reg-
ulators’ guidance regarding how to comply with existing
laws; and stating procedural rules which re?ect ‘‘the Con-
gressional judgment that such rules, because they do not
directly guide public conduct, do not merit the administra-
tive burdens of public input proceedings’’ (Gellhorn & Le-
vin, 1997, pp. 296–341).
In a critique of neo-institutional theory, Cooper et al.
(2008) observed that this perspective tends to neglect cer-
tain ‘‘voices’’ within the social/institutional milieu, by
implication, those voices are what Edelman et al. (2011)
termed the ‘‘disenfranchised’’ whose rights may be under-
mined by institutional processes. Consistent with this
theme, our manifest content analysis of comment letters
(Table 2) suggests that those letters not cited by the SEC
as having in?uenced its deliberations were those of the in-
tended bene?ciaries of the proposed regulation—individ-
ual investors, the ‘‘user’’ class (Laughlin and Puxty,
1983),—who supported the proposed possession standard
sans safe harbor modi?cations granting insiders room to
maneuver. This may suggest not ‘‘missing voices’’ in the
regulatory milieu, as their letters were sent to and logged
in by the SEC, but rather a deaf ear turned to the disenfran-
chised, thereby rendering them disempowered. As noted
above, our contrasting results for ‘‘cited’’ and ‘‘non-cited’’
letter writers (Table 2, Panels B–D) are harmonious with
Luke’s (2005) ?rst dimension of power wherein power is
overtly exercised by those to be regulated in that their
6
Added to the threat of budget reductions, the SEC may also be sued for
not being responsive to those regulated: The U.S. Chamber of Commerce,
for example, alleges in a lawsuit that the SEC did not pay suf?cient
consideration to its comments submitted during the comment phase
concerning a proposed regulation of mutual funds. The court ruled that the
SEC did not violate the law in creating the Rule, but it did remand the SEC to
reconsider the comment letters. The SEC wrote in response that it did
reconsider the comment letters and chose to not alter its original position
expressed in the ?nal regulation. The Chamber of Commerce has since ?led
another suit. Exacerbating the potential for regulator capture, a recent U.S.
Supreme Court decision (Citizens United v. Federal Election Commission,
2010) removes many restrictions on corporate campaign contributions to
congressional and presidential candidates (Denniston, 2010).
476 Z. Bozanic et al. / Accounting, Organizations and Society 37 (2012) 461–481
policy preferences prevailed over those who were to be
served and protected by the regulation. By implication,
although the SEC has long pledged an allegiance to protect-
ing investors by increasing their access to relevant and reli-
able information, thereby fostering a level playing ?eld
(e.g., Levitt, 1998; for a critique, see Cooper & Robson,
2006, p. 427), this pledged position may perhaps be de-
scribed as an espoused theory (Argyris, 1977). The actual
theory in use (Argyris, 1977) may be something quite differ-
ent: despite the rhetoric surrounding the regulation of insi-
der trading, the SEC was quite, almost solely responsive to
the position of those to be regulated whose goals were sur-
vival, pro?ts and growth, and values revolved around open
markets unfettered by burdensome regulations (see also
Merino & Neimark, 1982, for elaboration of this theme).
It is here that Luke’s (2005) second dimension of power
gains traction. Within this dimension, those with power
covertly set the agenda for what is to be subjected or not
subjected to open debate and become the target or non-
target of emerging public policies (in accounting, see Coo-
per & Robson, 2006, p. 426; Malsch & Gendron, 2011, p.
458; O’Leary, 1985, p. 88). Although we did examine the
letters of those not cited by the SEC as having in?uenced
its deliberations (Table 2, Panels B–D), our work focused
primarily on those who are enfranchised and empowered
within the regulatory/political arena. However, even here
the issue of overlooked ‘‘voices’’ nevertheless still arises—
those voices being those of the super enfranchised and
super empowered companies that house inside traders
(Edelman et al., 2011, pp. 923 and 941). On this theme,
Krawiec (2003, p. 487) observed that:
Across a range of legal regimes – including environmen-
tal, tort, employment discrimination, corporate, securi-
ties, and health care law – United States law reduces or
eliminates enterprise liability for those organizations
that can demonstrate the existence of ‘effective’ inter-
nal compliance structures. Presumably, this legal stan-
dard rests on an assumption that internal compliance
structures reduce the incidence of prohibited conduct
within organizations. . . [L]ittle evidence exists to
support that assumption.
Subsequently, Krawiec (2005, p. 572) marshaled
evidence to support this conjecture:
[A]t least since the adoption of the Organizational
Sentencing Guidelines (OSG) in 1991, the U.S. legal
regime has been moving away from a system of strict
vicarious liability toward a system of duty-based orga-
nizational liability. Under this system, organizational
liability for agent misconduct is dependent on whether
the organization has exercised due care to avoid the
harm in question, rather than on traditional agency
principles of ‘respondent superior.’ Courts and agencies
typically evaluate the level of care exercised by the
organization by inquiring whether the organization
had in place ‘internal compliance structures’ ostensibly
designed to detect and discourage such conduct. . . .I
argue, however, that any duty-based liability system
that conditions the organization’s duty on the presence
of internal compliance structures is likely to fail
because courts lack suf?cient information about the
effectiveness of such structures. As a result, an internal
compliance-based liability system encourages the
implementation of largely cosmetic internal compliance
structures that reduce legal liability without reducing
the incidence of organizational misconduct. (see also
Edelman et al., 2011, for further empirical support)
These ‘‘internal compliance structures’’ are precisely
the focus of Edelman and her colleagues (1999, 2011) con-
cerning the Civil Rights Act, who concluded that such
structures are symbolic rather than substantive demon-
strations of conformity to the Act. Consistent with this po-
sition, perhaps because of the presence of corporate codes
of ethical conduct prohibiting their members from engag-
ing in insider trading, or SOX-required internal control
structures exhibiting, for example, a proper ‘‘tone at the
top,’’ companies have tended to not be held liable for the
insider trading of their agents (Bainbridge, 1999). How-
ever, given the continuing existence of insider trading as
evidenced by, albeit mixed, empirical research sketched
in the introduction, and celebrated cases discussed in the
press in which scapegoats were sacri?ced (Cooper & Rob-
son, 2006, p. 429), it appears that these compliance struc-
tures may serve as mere symbolic displays rather than
substantively preventing insider trading (Meyer & Rowan,
1977). It may be that as it is now practiced the Administra-
tive Procedures Act, forti?ed by political pressure being
brought to bear and a neo-liberal ideology (Campbell,
2010; Cooper & Robson, 2006; Davidoff, 2010), has tipped
the balance in favor of those regulated (information pre-
parers per Laughlin & Puxty, 1983) at the expense of those
who are intended to bene?t from regulation (information
users). On this point, Merino and Neimark (1982, p. 51)
forcefully observed that the original 1933 and 1934 securi-
ties acts ‘‘may have contributed to the virtual absence of
any serious attempts to ensure corporate accountability
by broadening the set of transactions for which corpora-
tions are to be held accountable. . . [W]e must open the
agenda of accounting research and accounting policy to
consider the possibility of substantive corporate regulation
rather than the tokenism of legislation such as the securi-
ties acts.’’ Consistent with the endogenization thesis we
have explored, the role of regulatees in in?uencing regula-
tors to abandon the ‘‘respondent superior’’ principle, of
removing it from the agenda of open debate in the forma-
tion of public policy (Lukes, 2005), is worth further scru-
tiny, as well as their efforts in shaping the development
and application of the Administrative Procedures Act. It
may be that the SEC’s ‘‘decision’’ to issue the regulatee-
in?uenced insider trading regulation was not really a deci-
sion at all, but had already been preordained by the perva-
sive, institutionalized ideology of neo-liberalism and allied
commitment to free and open markets, unfettered by
overly restrictive regulations (Campbell, 2010; Ferraro,
Pfeffer, & Sutton, 2005). Here, consistent with a market
for excuses (Watts & Zimmerman, 1979; for telling cri-
tiques, see Lowe, Puxty, & Laughlin, 1983; O’Leary, 1985)
in a tone supportive of a neoliberal ideology, Manne
(1966) reasoned in his seminal paper that insider trading
should be legal because it offers an ef?cient form of
Z. Bozanic et al. / Accounting, Organizations and Society 37 (2012) 461–481 477
compensation for insiders, and by implication, that Rule
10b5-1 produces an economic equilibrium; according to
this interpretation, had a strict ‘‘knowing possession’’ rule
been enforced, investors may have had to bear signi?cant
costs in terms of higher (?xed) compensation for insiders.
In contrast with this orthodox, economics-based perspec-
tive, it may well be that insider trading could be effectively
curbed by once more adhering to strict, vicarious liability
and the traditional, pre-1991 principle of ‘respondent
superior,’ or by modifying the Administrative Procedures
Act to require that the views of bene?ciaries of proposed
regulations be considered at least on par with those of
regulatees. This adherence may proceed by invoking the
original ‘‘controlling person provision’’ speci?ed, albeit
ambiguously in Section 20 of the 1934 Act. In essence,
the agenda should be opened up. Overall, our analysis sug-
gests that the existence of endogenization is something of
a double-edged sword (see also, Edelman et al., 2011, p.
899). On the justice edge, it suggests that government is
responsive to those regulated. On the injustice edge, it sug-
gests that it is differentially responsive in which the agen-
da is managed. We believe that this is a critical issue for
future research to pursue.
On the other hand, such tweaking of law may not gain
suf?cient positive effect if the neo-liberal ideology, or more
nearly, worldview (Laughlin & Puxty, 1983) of supporting
free and open markets prevails. It is here that Luke’s
(2005) third dimension of power gains traction. This
dimension of power is covert in nature and not directly vis-
ible because the individual becomes a willing participant
complicit in the exercise of power in which an ideology
with which the individual is encultured becomes accepted
as the ‘‘natural order of things,’’ thereby obviating the ex-
plicit exercise of power. Extending this dimension as it
concerns public accounting regulation by incorporating a
line of reasoning developed by Foucault (e.g., 1983),
Malsch and Gendron (2011, pp. 458–459) reasoned that
this third form of power:
..shapes people’s thoughts and wishes so that differ-
ences of interest are prevented from occurring in the
?rst place. . .. [T]he absence of grievances therefore does
not necessarily imply genuine consensus because
power also operates ideologically, in?uencing people’s
thoughts and desires so that they accept their role in
the existing order of things.
Fromthis base, they went onto propose that the prevail-
ing discourse used to express ideology constitutes people
as subjects and structures the range of actions that are pos-
sible, ruling in some as legitimate and ruling others out as
beyond consideration or even recognition. They concluded
that (p.459) ‘‘[H]ow people think about and make sense of
an object, such as a regulation, does not emerge out of the
blue, but in a discursive context characterized with certain
conditions of possibility.’’ According to this perspective,
then, the SEC framed the proposed SDIT proposal using a
form of discourse implicitly supportive of the neo-liberal
ideology of ‘‘free and open markets’’ within which ‘‘infor-
mation preparers’’ and ‘‘information users’’ played estab-
lished roles with scripted positions in which the
existence of homo economicus was taken for granted. Here-
in, by aligning the goals of the organization of survival,
pro?ts and growth with those of its manager/insiders of
survival and pro?ts, the goals of the user/shareholder for
return on investment would be better assured. In turn, in-
sider trading provides an ef?cient form of compensation
(Manne, 1966). According to this ideology, it would be ac-
cepted that managers should be permitted, indeed encour-
aged to invest in their company amid an espoused theory
of fostering a level playing ?eld: the principle of manage-
ment trading is already accepted by preparers and users alike.
However, our empirical results portrayed in Panels B–D re-
veal that even though those who were to bene?t from the
proposed regulation and mouthed the correct words, they
were still not cited by the SEC as having in?uenced its
deliberations.
But beyond information users/investors, there exist
other ‘‘missing voices’’ (Cooper, Ezzamel, & Willmott,
2008) whose views were never attended to because even
they accept that those who are primary constituents of
‘‘free and open markets’’ should attend to ‘‘market regula-
tion’’ by the taken-for-granted-as-appropriate SEC. Accord-
ing to Cooper and Robson (2006, p. 427),
This naturalization suggests the dominance of a pro-
capital orientation for those who are involved in
accounting regulation, . . .[but that] general economic
welfare for a society as a whole is unlikely to be
achieved by the single minded pursuit of shareholder
interests. Yet there is now little discussion of the
requirements of other groups in society, such as
employees or consumer groups, for reliable ?nancial
information for their purposes, or how ideals such as
organizational and corporate accountability might be
usefully conceived and implemented.
Possible off-the-table actions, for example, might be
making management trading illegal, period, or by making
it illegal to sell stock acquired as compensation until
3 years after a manager has left a company, as regulated
and enforced by an agency other than the SEC so as to
engender ‘‘cultural standards of decency’’ (March, 1987,
p. 159). Of course, because Luke’s (2005) third dimension
of power is largely invisible, it may be the case that its play
will remain inherently undeterminable by research evi-
dence, thus necessitating application of a proliferation of
theories going beyond the endogenization strand of insti-
tutional theory we have advanced (O’Leary, 1985).
In closing, we concur with Edelman and Stryker’s posi-
tion (2005, p. 544) that researchers concerned with prob-
ing the dynamics of regulation should ‘‘treat law not as a
force outside of the socially embedded economy, but
rather as a force within, and a product of, that economy.’’
Acknowledgements
We wish to thank Lauren Edelman, John Meyer, Keith
Robson and Roy Suddaby for their thoughtful suggestions,
as well as the Editor, David Cooper, and the anonymous
reviewers for their guidance. We are also grateful to Alan
Jagolinzer and Daniel Russomanno for their research assis-
tance, and also the Deloitte & Touche Foundation and the
KPMG Foundation for their generous support.
478 Z. Bozanic et al. / Accounting, Organizations and Society 37 (2012) 461–481
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