Shadow Trading

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: Suggested Citation

Mehta, Mihir N. and Reeb, David M. and Zhao, Wanli, Shadow Trading (September 6, 2020). The Accounting Review, July 2021, Available at SSRN: https://ssrn.com/abstract=3689154