Insider Trading - Explained
What is Insider Trading?
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What is Insider Trading?
Stock trading by people who have information about securities and stocks that are confidential and not available to the general public is called Insider Trading. Sharing confidential company information with others as well as Insider Trading is illegal in most countries.The only exception to illegal Insider Trading is when the Directors or Proprietors with 10% or more stake in a company, liquidate their stocks and make this knowledge public via legal channels. The Securities and Exchange Commission has rules and regulations in place to thwart insider trading investments by insiders.
Academic Research on Insider Trading
- Continuous auctions and insider trading, Kyle, A. S. (1985). Econometrica: Journal of the Econometric Society, 1315-1335. This journal connects the dots between Insider Trading and Continuous Auctions using a dynamic model of sequential auctions. It examines the impact of confidential information on price fluctuation in a speculative market, showing how prices exhibit Brownian motion.
- Special information and insider trading, Jaffe, J. F. (1974). The Journal of Business, 47(3), 410-428. This article shows the relationship between Insider Trading by officers, directors, and more, and the consequent gain in profits by a margin of 10% overall, as deduced by studying the trading patterns of over 45 companies indulging in Insider Trading, over a period of six months.
- The world price of insider trading, Bhattacharya, U., & Daouk, H. (2002). The Journal of Finance, 57(1), 75-108. This book looks at Insider Trading laws in 87 countries off the 103 that have stock exchanges. It examines the cost of equities after the enforcement of these laws and prosecution of fraudulent trading practices.
- The regulation of insider trading, Carlton, D. W., & Fischel, D. R. (1982). Stan. L. Rev., 35, 857. This book discusses the impact of prohibiting Insider Trading within firms, and its long term effects on the survival of the firm in the capital market.
- An empirical analysis of illegal insider trading, Meulbroek, L. K. (1992). The Journal of Finance, 47(5), 1661-1699. This book analyses the effect of Insider Trading on day trading practices, using data from Securities and Exchange Commission on illegal Insider Trading. It discusses ways to regulate the stock market against this practice.
- Merger announcements and insider trading activity: An empirical investigation, Keown, A. J., & Pinkerton, J. M. (1981). The journal of finance, 36(4), 855-869. This paper samples 194 firms that were merged and the pattern of Insider Trading prevalent in their securities data prior to the merger. It sheds light on the pervasive problem of information leakage and its consequences on stock trading gains.
- Insider trading: Should it be prohibited?, Leland, H. E. (1992). Journal of Political Economy, 100(4), 859-887. This journal approaches the issue of Insider Trading from the other end and makes a case in favour of it with the help of an endogenous investment rational expectations model. It also identifies problems with this model.
- The walkdown to beatable analyst forecasts: The role of equity issuance and insider trading incentives, Richardson, S., Teoh, S. H., & Wysocki, P. D. (2004). Contemporary accounting research, 21(4), 885-924. This book takes a look at the various way firms indulge in Insider Trading, focussing on earning-guidance game where analysts give inflated earnings estimates, eventually reducing their forecast figures but not before managers and directors have offloaded their shares at a higher price. It sheds light on this symbiotic relationship between analysts and managers.
- Insider trading in credit derivatives, Acharya, V. V., & Johnson, T. C. (2007). Journal of Financial Economics, 84(1), 110-141. This book does a quantitative assessment of Insider Trading in the credits derivatives market. It finds evidence for incremental information leaks by banks, especially concerning negative news about credit and other trading entities, that subsequently suffer a fall in prices.
- Market efficiency and insider trading: New evidence, Rozeff, M. S., & Zaman, M. A. (1988). Journal of Business, 25-44. This book looks at facts and figures concerning Insider Trading information that rank outsiders are able to benefit from, and the impact on the efficiency of the market due to these anomalous transactions.
- Fraudulently misstated financial statements and insider trading: An empirical analysis, Summers, S. L., & Sweeney, J. T. (1998). Accounting Review, 131-146. This study examines the relationship between fraud and Insider Trading. It draws interesting insights based on empirical data from companies that indulge in Insider Trading and their fraud risk assessment.
- Corporate control, insider trading, and rates of return, Demsetz, H. (1986). The American Economic Review, 76(2), 313-316. This book outlines the relationship between Corporate Control, Insider Trading, and the profits so gained by looking at investment and holdings data from 511 firms.