More Insiders, More Insider Trading: Evidence from Private Equity Buyouts
Viral V. Acharya
New York University - Leonard N. Stern School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); New York University (NYU) - Department of Finance
Timothy C. Johnson
University of Illinois at Urbana-Champaign
October 1, 2009
Journal of Financial Economics, Forthcoming
This paper studies how insider trading intensity is aﬀected by the joint eﬀects of competition and regulation. Prior theoretical research has found that, in the absence of regulation, more insiders leads to more insider trading. We show that optimal regulation, however, features detection and punishment policies that get stricter as the number of insiders increases, giving rise to lower insider trading in equilibrium. We construct measures of the likelihood of insider activity prior to bid announcements of private equity buyouts during the period 2000-2006 and relate these to the number of ﬁnancing participants. We ﬁnd that suspicious stock and options activity is associated with more equity participants, while suspicious activity in bond and CDS markets is associated with more debt participants. These results may be consistent with models of limited competition among insiders, but are inconsistent with our model of optimal regulation.
Number of Pages in PDF File: 57
Keywords: asymmetric information, LBO, private equity, regulation
JEL Classification: D82, G14, K42
Date posted: November 29, 2009
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