Download This PaperLegal Risk and Insider Trading
Forthcoming at The Journal of Finance
110 Pages Posted: 17 Mar 2018 Last revised: 4 Apr 2023
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Legal Risk and Insider Trading
Becker Meets Kyle: Inside Insider Trading
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: Suggested Citation
European Corporate Governance Institute (ECGI)
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