How Much Insider Trading Happens in Stock Markets?

Abstract

We estimate that the prevalence of illegal insider trading is at least four times greater than the number of prosecutions. Using structural estimation methods that account for incomplete non-random detection and all US prosecuted insider trading cases, we estimate that insider trading occurs in 1-in-5 mergers and acquisitions and in 1-in-20 earnings announcements. We find that insider trading is more likely when the information is more valuable, more people are in possession of the information, and in more liquid stocks. 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