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Advance Disclosure of Insider Trading

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  • Stephen L. Lenkey

Abstract

Using a strategic rational expectations equilibrium framework, we show that forcing a well-informed insider to disclose her trades in advance tends to increase welfare for both the insider and less-informed outsiders. Advance disclosure generates price risk for the insider, and to mitigate this risk, the insider trades less aggressively on her private information. Consequently, outsiders face lower adverse selection costs, which improves risk sharing and increases welfare. The drop in trading aggressiveness also causes market efficiency to decline. Furthermore, pretrade disclosure encourages excessive risk taking but may either encourage or discourage managerial effort.

Suggested Citation

  • Stephen L. Lenkey, 2014. "Advance Disclosure of Insider Trading," The Review of Financial Studies, Society for Financial Studies, vol. 27(8), pages 2504-2537.
    • Handle: RePEc:oup:rfinst:v:27:y:2014:i:8:p:2504-2537.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhu026
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    Cited by:

    1. Lefebvre, Jérémie & Mazza, Paolo, 2023. "Advance disclosure of insider transactions: Empirical evidence from the Vietnamese stock market," International Review of Law and Economics, Elsevier, vol. 74(C).
    2. Zhou, Deqing & Wang, Wenjie, 2020. "Insider, outsider and information heterogeneity," The North American Journal of Economics and Finance, Elsevier, vol. 53(C).
    3. Semih Tartaroglu & Michael Imhof, 2017. "Insider trading and response to earnings announcements: the impact of accelerated disclosure requirements," Review of Quantitative Finance and Accounting, Springer, vol. 49(2), pages 315-336, August.
    4. Batten, Jonathan A. & Lončarski, Igor & Szilagyi, Peter G., 2021. "Strategic insider trading in foreign exchange markets," Journal of Corporate Finance, Elsevier, vol. 69(C).
    5. Stephen L. Lenkey, 2021. "Informed Trading with a Short-Sale Prohibition," Management Science, INFORMS, vol. 67(3), pages 1803-1824, March.
    6. Lenkey, Stephen L., 2017. "Insider trading and the short-swing profit rule," Journal of Economic Theory, Elsevier, vol. 169(C), pages 517-545.

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