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More insiders, more insider trading: Evidence from private-equity buyouts

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  • Acharya, Viral V.
  • Johnson, Timothy C.

Abstract

Prior theoretical research has found that, in the absence of regulation, a greater number of insiders leads to more insider trading. We show that optimal regulation features detection and punishment policies that become stricter as the number of insiders increases, reducing insider trading in equilibrium. We construct measures of the likelihood of insider activity prior to bid announcements of private-equity buyouts during the period 2000-2006 and relate these to the number of financing participants. Suspicious stock and options activity is associated with more equity participants, while suspicious bond and CDS activity is associated with more debt participants -- consistent with models of limited competition among insiders but inconsistent with our model of optimal regulation.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 98 (2010)
Issue (Month): 3 (December)
Pages: 500-523

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Handle: RePEc:eee:jfinec:v:98:y:2010:i:3:p:500-523

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Web page: http://www.elsevier.com/locate/inca/505576

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Keywords: Asymmetric information LBO Private equity Regulation;

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References

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Citations

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Cited by:
  1. Podolski, Edward J. & Truong, Cameron & Veeraraghavan, Madhu, 2013. "Informed options trading prior to takeovers – Does the regulatory environment matter?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 27(C), pages 286-305.
  2. Madura, Jeff & Marciniak, Marek, 2014. "Bidder country characteristics and informed trading in U.S. targets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 29(C), pages 256-284.
  3. Henk Berkman & Michael McKenzie & Patrick Verwijmeren, 2013. "Hole in the Wall: Informed Short Selling ahead of Private Placements," Tinbergen Institute Discussion Papers 13-153/IV/62, Tinbergen Institute.
  4. Qiu, Jiaping & Yu, Fan, 2012. "Endogenous liquidity in credit derivatives," Journal of Financial Economics, Elsevier, vol. 103(3), pages 611-631.
  5. Kedia, Simi & Zhou, Xing, 2014. "Informed trading around acquisitions: Evidence from corporate bonds," Journal of Financial Markets, Elsevier, vol. 18(C), pages 182-205.
  6. Brigida, Matthew & Madura, Jeff, 2012. "Sources of target stock price run-up prior to acquisitions," Journal of Economics and Business, Elsevier, vol. 64(2), pages 185-198.

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