Shadow Trading

The Accounting Review, Forthcoming

64 Pages Posted: 10 Sep 2020

See all articles by Mihir N. Mehta

Mihir N. Mehta

University of Michigan at Ann Arbor

David M. Reeb

National University of Singapore

Wanli Zhao

Renmin University of China

Date Written: September 6, 2020

Abstract

We investigate whether corporate insiders attempt to circumvent insider trading restrictions by using their private information to facilitate trading in economically-linked firms, a phenomenon we call “shadow trading.” Using measures of informed trading to proxy for shadow trading, we find increased levels of informed trading among business partners and competitors before a firm releases private information. To rule out alternative explanations, we examine two shocks to insiders’ incentives to engage in shadow trading: high-profile regulatory enforcement against conventional insider trading and staggered changes to their outside employment opportunities. Finally, we document attenuated levels of informed trading among business partners and competitors when firms prohibit shadow trading. Overall, we provide evidence that shadow trading is an undocumented and widespread mechanism that insiders use to avoid regulatory scrutiny.

Keywords: Business Partners, Insider Trading, Private Information, Information Transfers, Spillover, SEC

JEL Classification: D4, G14, K22

Suggested Citation

Mehta, Mihir N. and Reeb, David M. and Zhao, Wanli, Shadow Trading (September 6, 2020). The Accounting Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3689154

Mihir N. Mehta (Contact Author)

University of Michigan at Ann Arbor ( email )

701 Tappan Ave
Ann Arbor, MI 48109
United States

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

David M. Reeb

National University of Singapore ( email )

Mochtar Riady Building
15 Kent Ridge Drive
Singapore, 119245
Singapore

HOME PAGE: http://www.davidreeb.net

Wanli Zhao

Renmin University of China ( email )

59 Zhongguancun Street
Beijing, 100872
China

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