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Information networks: Evidence from illegal insider trading tips

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  • Ahern, Kenneth R.

Abstract

This paper exploits a novel hand-collected data set to provide a comprehensive analysis of the social relationships that underlie illegal insider trading networks. I find that inside information flows through strong social ties based on family, friends, and geographic proximity. On average, inside tips originate from corporate executives and reach buy-side investors after three links in the network. Inside traders earn prodigious returns of 35% over 21 days, with more central traders earning greater returns, as information conveyed through social networks improves price efficiency. More broadly, this paper provides some of the only direct evidence of person-to-person communication among investors.

Suggested Citation

  • Ahern, Kenneth R., 2017. "Information networks: Evidence from illegal insider trading tips," Journal of Financial Economics, Elsevier, vol. 125(1), pages 26-47.
    • Handle: RePEc:eee:jfinec:v:125:y:2017:i:1:p:26-47
    DOI: 10.1016/j.jfineco.2017.03.009
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    References listed on IDEAS

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    More about this item

    Keywords

    Illegal insider trading; Information networks; Social networks;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
    • Z13 - Other Special Topics - - Cultural Economics - - - Economic Sociology; Economic Anthropology; Language; Social and Economic Stratification

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