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Legal Risk and Insider Trading

Author

Listed:
  • MARCIN KACPERCZYK
  • EMILIANO S. PAGNOTTA

Abstract

Do illegal insiders internalize legal risk? We address this question with hand‐collected data from 530 SEC (the U.S. Securities and Exchange Commission) investigations. Using two plausibly exogenous shocks to expected penalties, we show that insiders trade less aggressively and earlier and concentrate on tips of greater value when facing a higher risk. The results match the predictions of a model where an insider internalizes the impact of trades on prices and the likelihood of prosecution and anticipates penalties in proportion to trade profits. Our findings lend support to the effectiveness of U.S. regulations' deterrence and the long‐standing hypothesis that insider trading enforcement can hamper price informativeness.

Suggested Citation

  • Marcin Kacperczyk & Emiliano S. Pagnotta, 2024. "Legal Risk and Insider Trading," Journal of Finance, American Finance Association, vol. 79(1), pages 305-355, February.
    • Handle: RePEc:bla:jfinan:v:79:y:2024:i:1:p:305-355
    DOI: 10.1111/jofi.13299
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    References listed on IDEAS

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    2. Tong, Jiarui & Wu, Dixin, 2025. "Local gambling preferences and insider trading profits: Evidence from China," Finance Research Letters, Elsevier, vol. 75(C).
    3. Lin, Le & Li, Nongwen, 2026. "Investor risk concern and opportunistic insider sales," Journal of Business Research, Elsevier, vol. 205(C).
    4. Bixing Qiao & Weixuan Xia, 2026. "Insider and stealth trading with dynamic legal risk," Papers 2605.27684, arXiv.org.
    5. Du, Shiyan & Lin, Wenlian & Pan, Jingchen, 2024. "Insider opportunistic trading through fast sales: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 86(C).
    6. Prachi Deuskar & Aditi Khatri & Jayanthi Sunder, 2025. "Insider Trading Restrictions and Informed Trading in Peer Stocks," Management Science, INFORMS, vol. 71(3), pages 2390-2412, March.

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