Competitive Threats, Information Asymmetry and Insider Trading

65 Pages Posted: 10 Aug 2015 Last revised: 21 Dec 2018

See all articles by Jiri Novak

Jiri Novak

Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Czech Republic

Michael (Minye) Tang

New York University (NYU)

Date Written: December 21, 2018

Abstract

This paper provides evidence that intensified product market competition increases information asymmetry between corporate insiders and investors. I use volume and gains from insider trading as proxies for information asymmetry. I show that when a firm faces competitive threats insiders purchase and sell more stocks and their trading better predicts future stock returns and long-term profitability changes. These results hold for several alternative measures of competitive intensity and they are related to the degree of restrictiveness of insider trading regulation. I show that future firm performance turns more idiosyncratic when competition intensifies increasing forecasting relevance of firm-specific information better known to insiders. Furthermore, I provide evidence that firms reduce informativeness of mandatory and voluntary disclosures leaving investors in a disadvantage.

Keywords: competition, product market fluidity, text analysis, information asymmetry, insider trading

JEL Classification: G14, G15, G30

Suggested Citation

Novak, Jiri and Tang, Michael, Competitive Threats, Information Asymmetry and Insider Trading (December 21, 2018). Available at SSRN: https://ssrn.com/abstract=2641525 or http://dx.doi.org/10.2139/ssrn.2641525

Jiri Novak (Contact Author)

Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Czech Republic ( email )

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Praha 1, 11000
Czech Republic
+420 222 112 314 (Phone)

HOME PAGE: http://ies.fsv.cuni.cz/cs/staff/novakji

Michael Tang

New York University (NYU) ( email )

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New York, NY 10012-1126
United States
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(212) 995-4004 (Fax)

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