Information Transfer, Rent Extraction and Insider Trading ― Who Internalised the Private Information Externality?

35 Pages Posted: 25 Sep 2014 Last revised: 29 Oct 2014

See all articles by Allan Hodgson

Allan Hodgson

University of Queensland - Faculty of Business, Economics and Law; Financial Research Network (FIRN)

Suntharee Lhaopadchan

Kasetsart University - Faculty of Management Sciences

Sirimon Treepongkaruna

The University of Western Australia; Financial Research Network (FIRN)

Date Written: September 25, 2014

Abstract

We examine corporate insider transactions around Sarbanes-Oxley §403 (SOX) regulatory regimes and subsequent Wall Street Journal (WSJ) media postings — and provide new evidence on the benefit/cost trade-off tension between private information transfer and stock trading costs. SOX increased abnormal returns for insiders in conjunction with market-maker induced higher trading costs — reversed after WSJ posting of Form 4. The highest trade-off impact was clustered around purchases by non-executive directors and intangible rich firms. We reject the notion that SOX provided an information externality to outside investors from accelerated reporting of insider profitability. Our alternative explanation is an (unintended) internal information externality to less informed non-executive directors (per Fishman and Hagerty 1995) at the expense of increased trading costs to outside investors (per Leland 1992). Highlighted are cost trade-offs from regulations intended to address investor information asymmetry, and the incremental role the media plays in disseminating second hand and pre-trading private information.

Keywords: insider regulatory cost/benefits, media and insider trading, insiders and intangibles, adverse trading costs and Sarbanes-Oxley

JEL Classification: G14, G18, G34, G38

Suggested Citation

Hodgson, Allan C. and Lhaopadchan, Suntharee and Treepongkaruna, Sirimon, Information Transfer, Rent Extraction and Insider Trading ― Who Internalised the Private Information Externality? (September 25, 2014). Available at SSRN: https://ssrn.com/abstract=2501294 or http://dx.doi.org/10.2139/ssrn.2501294

Allan C. Hodgson

University of Queensland - Faculty of Business, Economics and Law ( email )

4072 Brisbane, Queensland
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Suntharee Lhaopadchan (Contact Author)

Kasetsart University - Faculty of Management Sciences ( email )

199 Sukhumvit Road
Thungsukhla
Siracha, Chonburi 20230
Thailand

Sirimon Treepongkaruna

The University of Western Australia ( email )

35 Stirling Highway
Crawley, Western Australia 6009
Australia
+61864887853 (Phone)
+61864881086 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
81
Abstract Views
884
rank
332,974
PlumX Metrics