Rational Information Leakage

Management Science, 2014, 60(11): 2762-2775

34 Pages Posted: 25 Aug 2011 Last revised: 26 Feb 2016

See all articles by Raffi Indjejikian

Raffi Indjejikian

University of Michigan at Ann Arbor - Accounting

Hai Lu

University of Toronto - Rotman School of Management

Liyan Yang

University of Toronto - Rotman School of Management

Date Written: March 31, 2014

Abstract

Empirical evidence suggests that information leakage in capital markets is common. We present a trading model to study the incentives of an informed trader (e.g., a well informed insider) to voluntarily leak information about an asset's value to one or more independent traders. Our model shows that, while leaking information dissipates the insider's information advantage about the asset's value, it enhances his information advantage about the asset's execution price relative to other informed traders. The profit impact of these two effects are countervailing. When there are a sufficient number of other informed traders, the profit impact from enhanced information dominates. Hence, the insider has incentives to leak some of his private information. We label this rational information leakage and discuss its implications for the regulation of insider trading.

Keywords: Information leakage, insider trading, securities regulations

JEL Classification: G14, G18, D82

Suggested Citation

Indjejikian, Raffi J. and Lu, Hai and Yang, Liyan, Rational Information Leakage (March 31, 2014). Management Science, 2014, 60(11): 2762-2775, Available at SSRN: https://ssrn.com/abstract=1915649 or http://dx.doi.org/10.2139/ssrn.1915649

Raffi J. Indjejikian

University of Michigan at Ann Arbor - Accounting ( email )

701 Tappan Street
Ann Arbor, MI 48109-1234
United States

Hai Lu (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Liyan Yang

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

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