Legal Risk and Insider Trading

Forthcoming at The Journal of Finance

110 Pages Posted: 17 Mar 2018 Last revised: 4 Apr 2023

See all articles by Marcin T. Kacperczyk

Marcin T. Kacperczyk

Imperial College London - Accounting, Finance, and Macroeconomics; Centre for Economic Policy Research (CEPR)

Emiliano Pagnotta

Singapore Management University

Multiple version iconThere are 2 versions of this paper

Date Written: February 10, 2023

Abstract

Do illegal insiders internalize legal risk? We address this question with hand-collected data from
530 SEC investigations. Using two plausibly exogenous shocks to expected penalties, we show
that insiders trade less aggressively and earlier and concentrate on tips of greater value when
facing higher risk. The results match the predictions of a model where an insider internalizes
the impact of trades on prices and the likelihood of prosecution and anticipates penalties in
proportion to trade profits. Our findings lend support to the effectiveness of U.S. regulations’
deterrence and the long-standing hypothesis that insider trading enforcement can hamper price
informativeness.

Keywords: Private Information, Insider Trading, Trading Strategies, Liquidity, Asset Prices, Volume, Stock Markets, Option Markets, Volatility, SEC, Financial Crime

JEL Classification: D82, D83, G14, G18, G40, G41

Suggested Citation

Kacperczyk, Marcin T. and Pagnotta, Emiliano, Legal Risk and Insider Trading (February 10, 2023). Forthcoming at The Journal of Finance, Available at SSRN: https://ssrn.com/abstract=3142006 or http://dx.doi.org/10.2139/ssrn.3142006

Marcin T. Kacperczyk

Imperial College London - Accounting, Finance, and Macroeconomics ( email )

South Kensington campus
London SW7 2AZ
United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Emiliano Pagnotta (Contact Author)

Singapore Management University ( email )

Li Ka Shing Library
70 Stamford Road
Singapore, 178899
Singapore

HOME PAGE: http://www.emilianopagnotta.com

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