How Much Insider Trading Really Happens in Stock Markets?

Patel, Vinay; Putniņš, Tālis J.

doi:10.2139/ssrn.3764192

Cited by 6 publications

(3 citation statements)

References 37 publications

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“…Insider trading relating to US Food and Drug Administration (FDA) news is prevalent as drug‐related news is in the top five news events which has resulted in prosecuted insider trading filed by the US Securities and Exchange Commission (SEC; Ahern, 2020; Patel & Putnins, 2020). SEC insider trading cases indicate that confidential information relating to FDA news is leaked in advance by company insiders, related stakeholders and regulatory staff.…”

Section: Introductionmentioning

confidence: 99%

Informed options trading prior to FDA announcements

Bohmann

Patel

2022

Business Fin & Account

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We find that pre‐announcement implied volatility spreads and options trading activity are abnormally elevated and can predict Food and Drug Administration (FDA) announcement date stock returns. The effect is more pronounced in firms with higher levels of information asymmetry and lower‐quality corporate governance suggesting that some options traders are informed in advance of the details that affect the stock price impact of the FDA news. We provide the first examination of informed options trading prior to FDA announcements during a 21‐year period. Our findings have implications for regulators, investors and relevant firms.

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Section: Introductionmentioning

confidence: 99%

Informed options trading prior to FDA announcements

Bohmann

Patel

2022

Business Fin & Account

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“…Karpoff and Lou (2010) discuss the importance of short sellers for the detection of financial report misrepresentation. Patel and Putni ņš (2021) provide a structural estimation of the SEC insider trading detection rate. Kedia and Rajgopal (2011) study the role of constraints in the SEC budget for the commission of fraud by corporate managers.…”

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confidence: 99%

Legal Risk and Insider Trading

KACPERCZYK,

PAGNOTTA

2023

The Journal of Finance

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Do illegal insiders internalize legal risk? We address this question with hand‐collected data from 530 SEC (the U.S. Securities and Exchange Commission) investigations. Using two plausibly exogenous shocks to expected penalties, we show that insiders trade less aggressively and earlier and concentrate on tips of greater value when facing a higher risk. The results match the predictions of a model where an insider internalizes the impact of trades on prices and the likelihood of prosecution and anticipates penalties in proportion to trade profits. Our findings lend support to the effectiveness of U.S. regulations' deterrence and the long‐standing hypothesis that insider trading enforcement can hamper price informativeness.

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“…First, and most importantly, judge ideology likely affects both insider trading commitment and detection; therefore, using prosecuted cases makes it difficult to disentangle the effect of judge ideology on insider trading commitment. Second, prior literature finds that the actual prevalence of illegal insider trading is significantly greater than the number of prosecuted cases(Patel and Putniņš 2021), and thus focusing on prosecuted cases alone would severely underestimate the effect of judge ideology.32 Cohen et al (2012) show that opportunistic trades are more informative of firms' future returns than other trades, and the former type of trade is more likely to be subject to SEC enforcement action.33 In a sensitivity test, we use a two-step procedure to identify opportunistic trades. First, we classify an insider who has not placed a trade, regardless of direction, in the same month during any of the three preceding years as an opportunistic trader.…”

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confidence: 99%

Judge Ideology, SEC Enforcement, and Insider Trading

2021

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Extant evidence suggests that liberal judges prefer stricter securities enforcement to protect innocent investors. We find that firms located in circuits with more liberal judges perform fewer opportunistic insider sales, consistent with managers taking judges' preferences into consideration. This deterrent effect is stronger when insiders are more likely to be sued. The SEC also considers judge ideology when selecting litigation venues. Finally, we validate that liberal judges are associated with heavier penalties in insider trading cases. Overall, we provide the first evidence demonstrating the importance of judicial discretion and the joint efforts of government branches to deter illegal insider trading.

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How Much Insider Trading Really Happens in Stock Markets?

Cited by 6 publications

References 37 publications

Informed options trading prior to FDA announcements

Informed options trading prior to FDA announcements

Legal Risk and Insider Trading

Judge Ideology, SEC Enforcement, and Insider Trading

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