Internal information asymmetry, external reporting, and insider trading: Theory and evidence

초록

We examine how enhanced reporting mandates influence insider trading in the presence of information asymmetry among corporate insiders. We develop an insider trading model in which headquarters executives (HQEXs) are less informed about divisional profitability than divisional managers (DMs) and release public reports subject to external auditing. Our model shows that, when insiders have incentives to report optimistically, enhanced reporting mandates can promote DMs' share purchases based on information not shared with HQEXs. We provide supporting evidence from difference-in-differences analyses using a regulatory shock to segment reporting obligations, namely the adoption of SFAS 131. Our study offers new insights for policymakers.

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