More Insiders, More Insider Trading: Evidence from Private Equity Buyouts

57 Pages Posted: 14 Dec 2007 Last revised: 1 Dec 2009

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

London Business School; University of Illinois

Multiple version iconThere are 3 versions of this paper

Date Written: January 1, 2009

Abstract

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.

Keywords: asymmetric information, LBO, private equity, regulation

JEL Classification: D82, G14, K42

Suggested Citation

Acharya, Viral V. and Johnson, Timothy C., More Insiders, More Insider Trading: Evidence from Private Equity Buyouts (January 1, 2009). Available at SSRN: https://ssrn.com/abstract=1072703 or http://dx.doi.org/10.2139/ssrn.1072703

Viral V. Acharya (Contact Author)

New York University - Leonard N. Stern School of Business ( email )

44 West 4th Street
New York, NY NY 10012
United States

HOME PAGE: http://pages.stern.nyu.edu/~sternfin/vacharya/public_html/~vacharya.htm

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

New York University (NYU) - Department of Finance

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Tim Johnson

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

University of Illinois ( email )

601 E John St
Champaign, IL 61820
United States

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