Rational Information Leakage

Raffi Indjejikian (), Hai Lu () and Liyan Yang
Additional contact information
Raffi Indjejikian: Stephen M. Ross School of Business, University of Michigan, Ann Arbor, Michigan 48109
Hai Lu: Rotman School of Management, University of Toronto, Toronto, Ontario M5S 3E6, Canada

Management Science, 2014, vol. 60, issue 11, 2762-2775

Abstract: Empirical evidence suggests that information leakage in capital markets is common. We present a trading model to study the incentives of an informed trader (e.g., a well-informed insider) to voluntarily leak information about an asset’s value to one or more independent traders. Our model shows that, although leaking information dissipates the insider’s information advantage about the asset’s value, it enhances his information advantage about the asset’s execution price relative to other informed traders. The profit impact of these two effects are countervailing. When there are a sufficient number of other informed traders, the profit impact from enhanced information dominates. Hence, the insider has incentives to leak some of his private information. We label this rational information leakage and discuss its implications for the regulation of insider trading. This paper was accepted by Mary Barth, accounting .

Keywords: information leakage; insider trading; securities regulations (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:60:y:2014:i:11:p:2762-2775

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