Working Paper: CEPR ID: DP13928
Authors: Marcin Kacperczyk; Emiliano Pagnotta
Abstract: How do illegal insiders trade on private information? Do they internalize legal risk? Using hand-collected data on insiders prosecuted by the SEC, we find that, consistent with Kyle (1985), insiders manage trade size and timing according to market conditions and the value of information. Gender, age, and profession play a lesser role. Various shocks to penalties and likelihood of prosecution show that insiders internalize legal risk by moderating aggressiveness, providing support to regulators’ deterrence ability. Consistent with Becker (1968), following positive shocks to expected penalties, insiders concentrate on fewer signals of higher value. Thus, enforcement actions could hamper price informativeness.
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Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| legal penalties (K40) | trade size (F19) |
| legal penalties (K40) | trading behavior (G41) |
| legal risk (K13) | trade size (F19) |
| legal risk (K13) | trading strategies (G13) |
| increased penalties (K42) | reduced trade sizes (F12) |
| increased penalties (K42) | cautious trading behavior (G41) |
| positive shocks to expected penalties (D80) | concentration of trades (F19) |