How Harmful Is Insider Trading for Outsiders? Evidence from the Eighteenth Century

Abstract

This paper provides evidence on the financial consequences of insider trading for outsiders. We collect a novel data set that contains all equity trades of all corporate insiders and outsiders in an era without restrictions on informed trading. These data features allow us to study the profitability of insider trades and the expected loss outsiders incur due to insider trading. We show that access to private information creates a performance gap of 7% per year between insiders and outsiders. Nonetheless, outsiders' unconditional expected losses from insider trading are small because the probability of trading with an insider is low.

Keywords: insider trading, asymmetric information, financial history

JEL Classification: D82, G10, G12, G14