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Information Networks: Evidence from Illegal Insider Trading Tips

83 Pages Posted: 18 Oct 2014 Last revised: 30 Mar 2016

Kenneth R. Ahern

University of Southern California - Marshall School of Business; National Bureau of Economic Research (NBER)

Date Written: March 29, 2016

Abstract

This paper exploits a novel hand-collected dataset to provide a comprehensive analysis of the social relationships that underlie illegal insider trading networks. I find that inside information flows through strong social ties based on family, friends, and geographic proximity. On average, inside tips originate from corporate executives and reach buy-side investors after three links in the network. Inside traders earn prodigious returns of 35% over 21 days, with more central traders earning greater returns, as information conveyed through social networks improves price efficiency. More broadly, this paper provides some of the only direct evidence of person-to-person communication among investors.

Keywords: Illegal insider trading, information networks

JEL Classification: D83, D85, G14, K42, Z13

Suggested Citation

Ahern, Kenneth R., Information Networks: Evidence from Illegal Insider Trading Tips (March 29, 2016). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2511068 or http://dx.doi.org/10.2139/ssrn.2511068

Kenneth Robinson Ahern (Contact Author)

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA 90089
United States

HOME PAGE: http://www-bcf.usc.edu/~kahern/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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