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The Mandatory Disclosure of Trades and Market Liquidity

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  • Fishman, Michael J
  • Hagerty, Kathleen M
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    Abstract

    Financial market regulations require various "insiders" to disclose their trades after the trades are made. We show that such mandatory disclosure rules can increase insiders' expected trading profits. This is because disclosure leads to profitable trading opportunities for insiders even if they possess no private information on the asset's value. We also show that insiders will generally not voluntarily disclose their trades, so for disclosure to be forthcoming, it must be mandatory. Key to the analysis is that the market cannot observe whether an insider is trading on private information regarding asset value or is trading for personal portfolio reasons. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

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    Bibliographic Info

    Article provided by Society for Financial Studies in its journal Review of Financial Studies.

    Volume (Year): 8 (1995)
    Issue (Month): 3 ()
    Pages: 637-76

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    Handle: RePEc:oup:rfinst:v:8:y:1995:i:3:p:637-76

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    Cited by:
    1. Archishman Chakraborty & Bilge Yilmaz, . "Nested Information and Manipulation in Financial Markets," Rodney L. White Center for Financial Research Working Papers 6-00, Wharton School Rodney L. White Center for Financial Research.
    2. Dev, Pritha, 2013. "Transfer of information by an informed trader," Finance Research Letters, Elsevier, vol. 10(2), pages 58-71.
    3. Agarwal, Vikas & Jiang, Wei & Tang, Yuehua & Yang, Baozhong, 2011. "Uncovering hedge fund skill from the portfolio holdings they hide," CFR Working Papers 10-09 [rev.], University of Cologne, Centre for Financial Research (CFR).
    4. Chakraborty, Archishman & Yilmaz, Bilge, 2004. "Informed manipulation," Journal of Economic Theory, Elsevier, vol. 114(1), pages 132-152, January.
    5. Agarwal, Vikas & Mullally, Kevin Andrew & Tang, Yuehua & Yang, Baozhong, 2014. "Mandatory portfolio disclosure, stock liquidity, and mutual fund performance," CFR Working Papers 13-04 [rev.], University of Cologne, Centre for Financial Research (CFR).
    6. Subrahmanyam, Avanidhar & Titman, Sheridan, 1998. "Feedback from Stock Prices to Cash Flows†(formerly called “Real Effects of Financial Market Trading)," University of California at Los Angeles, Anderson Graduate School of Management qt2hw9m972, Anderson Graduate School of Management, UCLA.
    7. Giambona, Erasmo & Golec, Joseph, 2010. "Strategic trading in the wrong direction by a large institutional insider," Journal of Empirical Finance, Elsevier, vol. 17(1), pages 1-22, January.
    8. Agarwal, Vikas & Mullally, Kevin & Tang, Yuehua & Yang, Baozhong, 2013. "Mandatory portfolio disclosure, stock liquidity, and mutual fund performance," CFR Working Papers 13-04, University of Cologne, Centre for Financial Research (CFR).
    9. David Hirshleifer & Siew Hong Teoh, 2003. "Herd Behaviour and Cascading in Capital Markets: a Review and Synthesis," European Financial Management, European Financial Management Association, vol. 9(1), pages 25-66.
    10. Lee, Eun Jung & Eom, Kyong Shik & Park, Kyung Suh, 2013. "Microstructure-based manipulation: Strategic behavior and performance of spoofing traders," Journal of Financial Markets, Elsevier, vol. 16(2), pages 227-252.
    11. Bilge Yilmaz, . "A Theory of Takeover Bidding," Rodney L. White Center for Financial Research Working Papers 03-00, Wharton School Rodney L. White Center for Financial Research.
    12. Phuong Pham, Thu & Joakim Westerholm, P., 2013. "An international trend in market design: Endogenous effects of limit order book transparency on volatility, spreads, depth and volume," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 27(C), pages 202-223.
    13. Tālis J. Putniņš, 2012. "Market Manipulation: A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 26(5), pages 952-967, December.
    14. Xiangbo Liu & Zijun Liu & Zhigang Qiu, 2013. "Stock Market Manipulation in the Presence of Fund Flows," Annals of Economics and Finance, Society for AEF, vol. 14(2), pages 483-491, November.
    15. Emilio Barucci & Carlo Bianchi & Alberto Manconi, 2006. "Internal dealing regulation and insiders’ trades in the Italian financial market," European Journal of Law and Economics, Springer, vol. 22(2), pages 107-119, September.
    16. Bilge Yilmaz, . "A Theory of Takeover Bidding," Rodney L. White Center for Financial Research Working Papers 3-00, Wharton School Rodney L. White Center for Financial Research.
    17. Chakraborty, Archishman & Yilmaz, Bilge, 2004. "Manipulation in market order models," Journal of Financial Markets, Elsevier, vol. 7(2), pages 187-206, February.

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