Strategic Insider Trading: Disguising Order Flows to Escape Trading Competition

Journal of Corporate Finance, Forthcoming

41 Pages Posted: 2 Mar 2021

See all articles by Dingwei Gu

Dingwei Gu

Fudan University - School of Management

Xin Liu

School of Finance, Renmin University of China

Hanwen Sun

University of Bath, School of Management

Huainan Zhao

Loughborough University - School of Business and Economics

Date Written: November 14, 2020

Abstract

Short sellers actively exploit trading opportunities from insider sales. We argue that, in response to concern about potential order flow information leakage, insiders strategically disguise their order flows to escape trading competition. Our model predicts that, when short sellers are sensitive to order flow information, insiders are more likely to adopt a cautious trading strategy, i.e., splitting their trades over time. Empirically, we identify cautious trading by tracking consecutive transactions at the insider-strategy level. We find that, when anticipating intensive short selling potential, (1) insiders tend to trade cautiously; and (2) cautious insiders tend to reduce their initial trades. Overall, we highlight the strategic interaction between insiders and short sellers on the diffusion of order flow information.

Keywords: Insider Trading, Short Selling, Order Flows, Trading Competition, Cautious Strategy

JEL Classification: G12, G14, G23

Suggested Citation

Gu, Dingwei and Liu, Xin and Sun, Hanwen and Zhao, Huainan, Strategic Insider Trading: Disguising Order Flows to Escape Trading Competition (November 14, 2020). Journal of Corporate Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3730647

Dingwei Gu

Fudan University - School of Management ( email )

No. 670, Guoshun Road
No.670 Guoshun Road
Shanghai, 200433
China

Xin Liu

School of Finance, Renmin University of China ( email )

Room 307A
Mingde Main Building, Renmin University of China
Beijing, Beijing 100872
China

Hanwen Sun (Contact Author)

University of Bath, School of Management ( email )

School of Management, University of Bath
Bath
Bath, BA2 7AY
United Kingdom

Huainan Zhao

Loughborough University - School of Business and Economics ( email )

Epinal Way
Leics LE11 3TU
Leicestershire
United Kingdom

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