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Insider Trading in Supervised Industries

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  • David M. Reeb
  • Yuzhao Zhang
  • Wanli Zhao

Abstract

We investigate the impact of government agency oversight, such as by the Federal Reserve, on insider trading at the firm level. Regulatory supervision potentially limits trading based on material, nonpublic information, as it provides another layer of corporate governance to mitigate outflows of private information. Yet regulators themselves may serve as a source of information leakage, thereby facilitating insider-trading activity. We find, first, that in comparison to nonsupervised firms, supervised firms exhibit substantially greater trading based on inside information prior to earnings announcements. Second, in the first few days after firms provide private information to regulators or when regulators possess private information inaccessible to corporate insiders, these firms exhibit greater symptoms of insider trading. Finally, within a given supervised industry, insider-trading symptoms appear more pronounced when regulators exhibit greater leniency or operate in states with more political corruption. These insider-trading activities translate into over $1 billion in annual transfers.

Suggested Citation

  • David M. Reeb & Yuzhao Zhang & Wanli Zhao, 2014. "Insider Trading in Supervised Industries," Journal of Law and Economics, University of Chicago Press, vol. 57(3), pages 529-559.
    • Handle: RePEc:ucp:jlawec:doi:10.1086/678269
    DOI: 10.1086/678269
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    Cited by:

    1. Olivier Rousse & Benoît Sévi, 2017. "Informed Trading in Oil-Futures Market," Working Papers hal-01460186, HAL.
    2. Olivier Rousse & Benoît Sévi, 2016. "Informed Trading in Oil-Futures Market," Working Papers hal-01410093, HAL.
    3. Berkman, Henk & Eugster, Marco, 2017. "Short on drugs: Short selling during the drug development process," Journal of Financial Markets, Elsevier, vol. 33(C), pages 102-123.
    4. Neupane, Biwesh & Thapa, Chandra & Marshall, Andrew & Neupane, Suman, 2021. "Mimicking insider trades," Journal of Corporate Finance, Elsevier, vol. 68(C).
    5. Bernile, Gennaro & Hu, Jianfeng & Tang, Yuehua, 2016. "Can information be locked up? Informed trading ahead of macro-news announcements," Journal of Financial Economics, Elsevier, vol. 121(3), pages 496-520.
    6. Wei Huang & Bin Qiu, 2022. "Passive insider trading before pension freezes," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 45(3), pages 607-631, September.
    7. Wu, Zekun & Borochin, Paul & Golec, Joseph, 2024. "Informed options trading before FDA drug advisory meetings," Journal of Corporate Finance, Elsevier, vol. 84(C).
    8. Ping-Sheng Koh & David M. Reeb & Wanli Zhao, 2018. "CEO Confidence and Unreported R&D," Management Science, INFORMS, vol. 64(12), pages 5725-5747, December.

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