Public Disclosure of Insider Trades, Trading Costs, and Price Discovery
28 Pages Posted: 20 Jul 1998
Date Written: June 5, 1998
The trading decisions of a rent-seeking corporate insider who possesses long-lived private information are complicated by the regulatory requirement that he publicly disclose his trades after the fact. Such disclosure may allow other market participants to infer the insider's information. Yet the empirical evidence suggests that some corporate insiders buy and sell frequently, and insiders' profits on stock trades are abnormally large. We present a closed form solution for an insider's equilibrium stock trading strategy in a multiperiod rational expectations framework. The insider uses a mixed strategy to diminish the market maker's ability to infer the insider's private information. Relative to the benchmark established by Kyle (1985), we find that disclosure accelerates price discovery, and, in contrast to earlier models by Fishman and Hagerty (1995) and John and Narayanan (1997), mandatory disclosure unambiguously reduces insider profits. Regulatory implications are considered.
JEL Classification: G28, K22, M41
Suggested Citation: Suggested Citation