Information Networks: Evidence from Illegal Insider Trading Tips
83 Pages Posted: 18 Oct 2014 Last revised: 30 Mar 2016
Date Written: March 29, 2016
This paper exploits a novel hand-collected dataset to provide a comprehensive analysis of the social relationships that underlie illegal insider trading networks. I find that inside information flows through strong social ties based on family, friends, and geographic proximity. On average, inside tips originate from corporate executives and reach buy-side investors after three links in the network. Inside traders earn prodigious returns of 35% over 21 days, with more central traders earning greater returns, as information conveyed through social networks improves price efficiency. More broadly, this paper provides some of the only direct evidence of person-to-person communication among investors.
Keywords: Illegal insider trading, information networks
JEL Classification: D83, D85, G14, K42, Z13
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