Market Manipulation and the Role of Insider Trading Regulations

Kose John and Ranga Narayanan

The Journal of Business, 1997, vol. 70, issue 2, 217-47

Abstract: The authors show that the regulation requiring corporate insiders to disclose their trades ex post creates incentives for informed insiders to manipulate the market by sometimes trading against their information. This allows them to increase their trading profits by maintaining their information advantage over the market for a longer period of time. Such manipulation lowers initial bid-ask spreads. The authors show how the insider's likelihood of manipulation is affected by her information advantage, the number of other insiders, market liquidity, the early arrival of public information, and the choice of trade size. The short swing profit rule curtails this manipulation. Copyright 1997 by University of Chicago Press.

Date: 1997
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