Public disclosure and dissimulation of insider trades

Steven Huddart; John S. Hughes; Carolyn B. Levine

doi:10.1111/1468-0262.00209

Public disclosure and dissimulation of insider trades

Steven Huddart, John S. Hughes, Carolyn B. Levine

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133 Scopus citations

Abstract

Regulation requiring insiders to publicly disclose their stock trades after the fact complicates the trading decisions of informed, rent-seeking insiders. Given this requirement, we present an insider's equilibrium trading strategy in a multiperiod rational expectations framework. Relative to Kyle (1985), price discovery is accelerated and insider profits are lower. The strategy balances immediate profits from informed trades against the reduction in future profits following trade disclosure and, hence, revelation of some of the insider's information. Our results offer a novel rationale for contrarian trading: dissimulation, a phenomenon distinct from manipulation, may underlie insiders' trading decisions.

Original language	English (US)
Pages (from-to)	665-681
Number of pages	17
Journal	Econometrica
Volume	69
Issue number	3
DOIs	https://doi.org/10.1111/1468-0262.00209
State	Published - 2001

All Science Journal Classification (ASJC) codes

Economics and Econometrics

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10.1111/1468-0262.00209

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abstract = "Regulation requiring insiders to publicly disclose their stock trades after the fact complicates the trading decisions of informed, rent-seeking insiders. Given this requirement, we present an insider's equilibrium trading strategy in a multiperiod rational expectations framework. Relative to Kyle (1985), price discovery is accelerated and insider profits are lower. The strategy balances immediate profits from informed trades against the reduction in future profits following trade disclosure and, hence, revelation of some of the insider's information. Our results offer a novel rationale for contrarian trading: dissimulation, a phenomenon distinct from manipulation, may underlie insiders' trading decisions.",

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AB - Regulation requiring insiders to publicly disclose their stock trades after the fact complicates the trading decisions of informed, rent-seeking insiders. Given this requirement, we present an insider's equilibrium trading strategy in a multiperiod rational expectations framework. Relative to Kyle (1985), price discovery is accelerated and insider profits are lower. The strategy balances immediate profits from informed trades against the reduction in future profits following trade disclosure and, hence, revelation of some of the insider's information. Our results offer a novel rationale for contrarian trading: dissimulation, a phenomenon distinct from manipulation, may underlie insiders' trading decisions.

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Public disclosure and dissimulation of insider trades

Abstract

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