Becker Meets Kyle: Inside Insider Trading

Marcin Kacperczyk and Emiliano Pagnotta

No 13928, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: How do illegal insiders trade on private information? Do they internalize legal risk? Using hand-collected data on insiders prosecuted by the SEC, we find that, consistent with Kyle (1985), insiders manage trade size and timing according to market conditions and the value of information. Gender, age, and profession play a lesser role. Various shocks to penalties and likelihood of prosecution show that insiders internalize legal risk by moderating aggressiveness, providing support to regulators’ deterrence ability. Consistent with Becker (1968), following positive shocks to expected penalties, insiders concentrate on fewer signals of higher value. Thus, enforcement actions could hamper price informativeness.

Date: 2019-08
New Economics Papers: this item is included in nep-fmk
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