Insider Trade Disclosure, Market Efficiency, and Liquidity

Abstract

Is a more transparent market also more efficient and liquid? We address this question by analyzing the impact of mandatory ex-post disclosure of corporate insider trades in a dynamic model of strategic risk averse insider trading. We show that trade disclosure reduces informational efficiency of prices, may cause the market to be less liquid, and may even increase insiders’ expected utility. In a more transparent market, the informed trader uses a less aggressive trading strategy in order to prevent the market maker from perfectly inferring the private information from public records, and to maintain her informational advantage over time. Our results then question the effectiveness of disclosure regulations.

Keywords: corporate insider trading, market transparency, trade disclosure, market efficiency, liquidity

JEL Classification: D82, G14, G18