How Much Insider Trading Happens in Stock Markets?

Abstract

We estimate that the actual prevalence of illegal insider trading is at least four times greater than the number of prosecutions. Using novel structural estimation methods that explicitly account for the incomplete and non-random detection and hand-collected data of all US prosecuted insider trading cases, we estimate that insider trading occurs in one in five mergers and acquisition events and in one in 20 earnings announcements. Key drivers of the decision to engage in illegal insider trading include stock liquidity, the value of the inside information, and the number of people in possession of the information. Detection and prosecution are more likely when there are abnormal trading patterns and more regulatory resourcing.

Keywords: insider trading, prosecution, detection controlled estimation, M&A, earnings

JEL Classification: G14