Product Recall Decisions and the CEO - Informed Trading in the Medical Device Industry

In the medical device industry, a product defect is often known inside a company long before a recall becomes public—and the CEO sits at the center of that decision, especially for the most severe, life-threatening (Class I) cases. This raises a pointed question: does privileged access to recall information tempt CEOs into informed trading?

Using a hand-collected dataset of publicly traded U.S. medical device manufacturers, we find that CEOs are roughly three times more likely to sell shares while their firm is weighing a Class I recall that has drawn no prior public complaints—the most opaque cases—than at other times. Those sales let them avoid abnormal stock declines of about 15% over the following six months, worth roughly $160,000 in averted losses on average. The behavior disappears once prior complaints make the situation more transparent. As the first evidence of informed trading within the recall decision process, our findings highlight operational transparency—and closer coordination between regulators such as the FDA and SEC—as a structural deterrent to insider trading.