Becker Meets Kyle: Legal Risk and Insider Trading

61 Pages Posted: 17 Mar 2018 Last revised: 14 Nov 2020

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

Imperial College Business School

Multiple version iconThere are 2 versions of this paper

Date Written: November 12, 2020

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, Becker Meets Kyle: Legal Risk and Insider Trading (November 12, 2020). 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)

Imperial College Business School ( email )

Imperial College Business School, Tanaka Building
London, SW7 2AZ
Great Britain
+447478734028 (Phone)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
550
Abstract Views
2,700
rank
58,423
PlumX Metrics