Public Disclosure of Insider Trades, Trading Costs, and Price Discovery

28 Pages Posted: 20 Jul 1998

See all articles by Steven J. Huddart

Steven J. Huddart

Pennsylvania State University, University Park - Department of Accounting

John S. Hughes

University of California at Los Angeles

Carolyn B. Levine

Carnegie Mellon University - David A. Tepper School of Business

Date Written: June 5, 1998

Abstract

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

Huddart, Steven J. and Hughes, John S. and Levine, Carolyn B., Public Disclosure of Insider Trades, Trading Costs, and Price Discovery (June 5, 1998). Available at SSRN: https://ssrn.com/abstract=98719 or http://dx.doi.org/10.2139/ssrn.98719

Steven J. Huddart (Contact Author)

Pennsylvania State University, University Park - Department of Accounting ( email )

University Park, PA 16802-3603
United States
814-863-0448 (Phone)

HOME PAGE: http://directory.smeal.psu.edu/sjh11

John S. Hughes

University of California at Los Angeles ( email )

D410 Anderson Complex
Los Angeles, CA 90095-1481
United States
310-794-9553 (Phone)
310-267-2193 (Fax)

Carolyn B. Levine

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

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