Price Revelation from Insider Trading: Evidence from Hacked Earnings News
88 Pages Posted: 16 Apr 2019 Last revised: 3 Nov 2020
Date Written: November 2, 2020
From 2010--2015, a group of traders illegally accessed earnings information hours before their public release by hacking several major newswire services. We use their informed trading as a natural experiment to investigate how efficiently markets incorporate private information in trades. 15\% of a firm’s earnings surprise was incorporated into its stock price prior to its public release, when the hackers were trading. Their trading activity sharply increased order flow, causing liquidity providers to charge higher spreads, consistent with classical models of market microstructure. The increase in spreads was large enough to reduce the profitability of uniformed trades, suggesting that informed trading can have adverse effects on financial markets.
Keywords: cyber risks, earnings announcements, insider trading, market price efficiency
JEL Classification: G10, G12, G14
Suggested Citation: Suggested Citation