Digital Insiders and Informed Trading before Earnings Announcements

43 Pages Posted: 30 May 2018 Last revised: 10 Jul 2019

See all articles by Henk Berkman

Henk Berkman

University of Auckland - Business School

Jonathan Jona

Tulane University, A.B. Freeman School of Business, Finance & Economics, Students

Gladys Lee

University of Melbourne

Naomi S. Soderstrom

University of Melbourne

Date Written: May 30, 2019

Abstract

We use firm-specific measures of cybersecurity risk mitigation based on textual analysis of 10-Ks to proxy for the probability of trading with digital insiders – hackers who target corporations to obtain non-public corporate information for illegal trading. We find that prior to earnings announcements, a larger share of new earnings information is already incorporated into prices for firms with low cybersecurity risk mitigation scores. We also find that pre-announcement trading by short sellers is more predictive of earnings surprises for firms with low cybersecurity risk mitigation. Further, on days closer to earnings announcements, firms with relatively low cybersecurity risk mitigation scores experience a larger increase in bid-ask spreads, particularly the adverse selection component. These results suggest that weak cybersecurity risk mitigation provides opportunities for acquisition of private information and that trading by privately informed traders is more likely in stocks of firms with higher exposure to cybercrimes.

Keywords: cost of liquidity, cybersecurity, cyber risk disclosure, hacker, adverse selection, bid ask spread, price impact, Amihud ratio, insider trading, probability of informed trading, private information, adverse selection

JEL Classification: G14, G18, K24, M48, M41

Suggested Citation

Berkman, Henk and Jona, Jonathan and Lee, Gladys and Soderstrom, Naomi S., Digital Insiders and Informed Trading before Earnings Announcements (May 30, 2019). Available at SSRN: https://ssrn.com/abstract=3180531 or http://dx.doi.org/10.2139/ssrn.3180531

Henk Berkman

University of Auckland - Business School ( email )

Private Bag 92019
Room: 577
Auckland
New Zealand
(64 9) 3737599 Ext. 7181 (Phone)
(64 9) 3737406 (Fax)

Jonathan Jona (Contact Author)

Tulane University, A.B. Freeman School of Business, Finance & Economics, Students ( email )

7 McAlister Drive
New Orleans, LA
United States

Gladys Lee

University of Melbourne ( email )

185 Pelham Street
Carlton, Victoria 3053
Australia

Naomi S. Soderstrom

University of Melbourne ( email )

Victoria
Melbourne, 3010
Australia

Register to save articles to
your library

Register

Paper statistics

Downloads
184
Abstract Views
1,285
rank
166,749
PlumX Metrics