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Public disclosure of trades by corporate insiders in financial markets and tacit coordination

Steven Huddart, John S. Hughes, and Carolyn Levine

We consider the consequences of public disclosure of insider trades on trading costs and price discovery in financial markets. Similar to Cournot competition in product markets, corporate insiders with common private information have incentive to trade more aggressively than a monopolist with the same information. Since, given periodic financial corporate reporting, insiders routinely have access to information in advance of the market, it is reasonable to expect them to seek ways to limit trades and, thereby, increase profits. Public reporting of insider trades may have the unintended effect of furthering tacit coordination by allowing insiders to monitor each others' trades. Moreover, even without such reporting, we show how insiders may be able to sustain coordinated behavior depending on the distribution characterizing liquidity trading. Thus, competition among corporate insiders may be less influential in price discovery than previously thought, implying a lesser role for insider trading as a substitute for financial reporting.

Chapter 6 in Essays on Accounting Theory in Honour of Joel S. Demski, Rick Antle, Pierre Jinghong Liang, and Froystein Gjesdal, editors, (New York, NY: Springer, 2005) 103-128.

Keywords: trigger strategy, cooperation, insider trading profits, trading volume

JEL Classification: D82 G18 L13 M41

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Steven Huddart
Smeal College of Business, Penn State University, University Park, PA 16802-3603 USA
(814) 865-3271
(814) 863-8393 fax
huddart@psu.edu
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