Does Insider Trading Always Increase Financial Friction? A Model of Equity Market with Information Asymmetry

Abstract Rule 10b5-1 enables insiders to preplan future trades before becoming informed. Within a strategic rational expectations equilibrium framework, I characterize an insider’s unique optimal trading plan, which balances portfolio diversification against exploitation of the rule’s selective termination option. Because the rule reduces adverse selection and provides insurance against bad outcomes, the rule generally improves welfare for both the insider, who later becomes informed, and uninformed outsiders, provided there exists a sufficient degree of information asymmetry. Eliminating the rule’s selective termination option results in an even greater welfare improvement under a large subset of parametric conditions. Received March 9, 2018; editorial decision January 11, 2019 by Editor Wei Jiang.

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Insider Trading, Earnings Management and Information Asymmetry

SSRN Electronic Journal ◽

10.2139/ssrn.2579295 ◽

2015 ◽

Author(s):

Abu Zakir Md. Rasel Chowdhury ◽

Sabur Mollah ◽

Omar Al Farooque

Keyword(s):

Earnings Management ◽

Information Asymmetry ◽

Insider Trading

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Evidence on board size and information asymmetry: A capital markets perspective

Corporate Ownership and Control ◽

10.22495/cocv4i2c2p1 ◽

2007 ◽

Vol 4 (2) ◽

pp. 248-256 ◽

Cited By ~ 1

Author(s):

Susan Flaherty ◽

Joanne Li ◽

Kenneth Small

Keyword(s):

Information Asymmetry ◽

Adverse Selection ◽

Equity Market ◽

Market Liquidity ◽

Board Members ◽

Direct Relation ◽

Board Size ◽

Bid Ask Spread ◽

Adverse Selection Costs ◽

Bid Ask Spreads

We examine the relation of board size with market liquidity and adverse selection costs using a sample of Fortune 200 companies. After controlling for firm specifics, equity characteristics, and ratio of insiders, we find a direct relation between board size and equity market liquidity. Our findings indicate that board size is positively and significantly related to dollar depth but has no impact on bid-ask spreads. Furthermore, using the adverse selection component of the bid-ask spread as a proxy for transparency, we find that larger boards reduce information asymmetries, but the ratio of insiders to total board members has no impact on informational asymmetries

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Theoretical Profiles for the Evaluation of Insider Trading in a Functional Model of Financial Instruments Market

International Journal of Business Administration ◽

10.5430/ijba.v9n1p1 ◽

2017 ◽

Vol 9 (1) ◽

pp. 1

Author(s):

Paola Fandella

Keyword(s):

Information Asymmetry ◽

Insider Trading ◽

Capital Market ◽

Market Equilibrium ◽

Functional Model ◽

Securities Market ◽

Financial Instruments ◽

Viscosity Effect ◽

Significant Barrier ◽

Positive Effect

The analysis is based on the premise that the capital market is characterized by weak forms of risk management, to be intended, in this case, as risk of information asymmetry as well as operational inefficiency, as there are no hedging schemes to prevent external actions and internal mechanisms are not inspired by adequate transparency principles.After a critical review of the theoretical effects of insider trading, starting with a market equilibrium assessment, this analysis seeks to demonstrate the absence of any positive effect linked to insider trading in relation to any type of variable and for any model of the securities market.Starting from the assumption that the negative trading activity of insiders manifests in any securities market structure, it has been shown that an operating model characterized by the presence of professional operators appears to be more capable of opposing a significant barrier to the entry of insiders.On the other hand, it has also been shown that the presence of professional operators cannot act alone and it may also lose action incisiveness and even cause informative viscosity effect, when such professional or institutional operators are directly involved in privatization operations.

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Patterns of Insider Trading: It Is Not All Black and White

Journal of Accounting Auditing & Finance ◽

10.1177/0148558x20963637 ◽

2020 ◽

pp. 0148558X2096363

Author(s):

Mehrzad Azmi Shabestari ◽

Min Cao ◽

Bharat Sarath

Keyword(s):

Information Asymmetry ◽

Insider Trading ◽

The United States ◽

Regular Pattern ◽

Earnings Announcement ◽

Quarterly Earnings ◽

Black And White ◽

Predictable Pattern ◽

The Difference ◽

High Information

The regular pattern of quarterly earnings announcements sets up a predictable pattern of information asymmetry in the market. Both regulatory restrictions and voluntary corporate restrictions direct trading to low information asymmetry periods. To understand the effect of these restrictions, this study examines insider trading in three different windows: white windows (3–12 trading days after the earnings announcement, periods with low information asymmetry), black windows (all the other days in the quarter, periods with higher information asymmetry), and the blackest windows (the last 10 trading days of the black window, periods with the highest information asymmetry). First, our results show that a large proportion of insider trading in the United States takes place in the black window. Second, we document that trading in the white period exhibits a strong self-selection bias. We also show that the excess returns earned by black period trades vanish if postponed to the next white period following the earnings announcement. Finally, we show that a relatively large proportion of pre-specified trading under SEC-sponsored 10b5-1 plans are filed for black window periods, but the difference across black and white window plans is a matter of frequency of trade rather than the magnitude of profits. Overall, these results suggest that insiders balance the risk and profitability of their trading in white and black windows and that insider trading restriction in high-information asymmetry periods is not effective in practice.

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