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Robert T Miller - One of the best experts on this subject based on the ideXlab platform.
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Insider Trading and the public enforcement of private prohibitions some complications in enforcing simple rules for a complex world
European Journal of Law and Economics, 2021Co-Authors: Robert T MillerAbstract:Accepting the argument made by Manne, Epstein and others that firms wishing to allow their employees to Insider trade should be permitted to do so, this article shows that there is still a crucial role for government in regulating Insider Trading. In particular, allowing employees to profit by Insider Trading is a form of employee compensation that, in contradistinction from conventional forms of equity compensation, results in unknowable and effectively unlimited costs to the company. Since providing employee compensation in this form causes the company to lose control of its compensation expense, even if Insider Trading were legal, virtually every company would rely on conventional forms of employee compensation and prohibit its employees from Insider Trading. But, pace Manne, Epstein and others, companies lack the means to detect Insider Trading by their employees, and even when they do catch employees Insider Trading, companies can impose only mild contractual sanctions, generally not exceeding disgorgement of profits and dismissal. As a result, although an efficient agreement between a company and its employee would prohibit the employee from Insider Trading, this prohibition cannot be effectively enforced by the company. Government, with its usual law enforcement powers, is better able to detect Insider Trading and can impose more severe sanctions on violators, including criminal penalties. Government should thus enforce a ban on Insider Trading in those instances, which will be virtually all instances, in which a company prohibits its employees from Insider Trading. The efficient solution is thus a hybrid system of private prohibition and public enforcement. Such a system is not unusual but the norm. Employers prohibit employees from embezzling their money and stealing their property, and employees are subject to contractual sanctions and dismissal for violating these prohibitions, but we still need statutes against theft to generate an optimal level of deterrence. This is all the more true when the employee misappropriates information, which is much harder to detect than a theft of money or property.
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Insider Trading and the public enforcement of private prohibitions some complications in enforcing simple rules for a complex world
Social Science Research Network, 2021Co-Authors: Robert T MillerAbstract:Accepting the argument made by Manne, Epstein and others that firms wishing to allow their employees to Insider trade should be permitted to do so, this article shows that there is still a crucial role for government in regulating Insider Trading. In particular, allowing employees to profit by Insider Trading is a form of employee compensation that, in contradistinction from conventional forms of equity compensation, results in unknowable and effectively unlimited costs to the company. Since providing employee compensation in this form causes the company to lose control of its compensation expense, even if Insider Trading were legal, virtually every company would rely on conventional forms of employee compensation and prohibit its employees from Insider Trading. But, pace Epstein, companies lack the means to detect Insider Trading by their employees, and even when they do catch employees Insider Trading, companies can impose only mild contractual sanctions, generally not exceeding disgorgement of profits and dismissal. As a result, although an efficient agreement between a company and its employee would prohibit the employee from Insider Trading, this prohibition cannot be effectively enforced by the company. Government, with its usual law enforcement powers, is better able to detect Insider Trading and can impose more severe sanctions on violators, including criminal penalties. Government should thus enforce a ban on Insider Trading in those instances, which will be virtually all instances, in which a company prohibits its employees from Insider Trading. The efficient solution is thus a hybrid system of private prohibition and public enforcement. Such a system is not unusual but the norm. Employers prohibit employees from embezzling their money and stealing their property, and employees are subject to contractual sanctions and dismissal for violating these prohibitions, but we still need statutes against theft to generate an optimal level of deterrence. This is all the more true when the employee misappropriates information, which is much harder to detect than a theft of money or property.
Messod Daniel Beneish - One of the best experts on this subject based on the ideXlab platform.
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Insider Trading earnings quality and accrual mispricing
The Accounting Review, 2002Co-Authors: Messod Daniel Beneish, Mark E VargusAbstract:This paper investigates whether Insider Trading is informative about earnings quality and the valuation implications of accruals. We show that (1) the one‐year‐ahead persistence of income‐increasing accruals is significantly lower when accompanied by abnormal Insider selling and greater when accompanied by abnormal Insider buying; (2) the accrual mispricing phenomenon observed in previous work (e.g., Sloan 1996) is due to the mispricing of income‐increasing accruals; (3) one‐year‐ahead hedge returns to Trading strategies based on the direction of accruals and Insider Trading significantly exceed those based on accruals alone; and (4) the lower persistence of income‐increasing accruals accompanied by abnormal Insider selling appears to be at least partly attributable to opportunistic earnings management. Our evidence suggests that market participants and researchers can use managers' contemporaneous Trading in ex ante assessing the likelihood that the firms' accruals are of high or low quality, and in asse...
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Insider Trading earnings quality and accrual mispricing
Social Science Research Network, 2001Co-Authors: Mark E Vargus, Messod Daniel BeneishAbstract:The paper provides evidence that the signal contained in Insiders' Trading behavior is useful in making refined assessments of earnings quality, and informative about the valuation implications of accruals. We find that income-increasing accruals and unexpected accruals have lower (higher) persistence when managers engage in abnormal selling (buying) suggesting that Insider Trading information is useful in assessing the quality of the non-cash components of earnings. We show that the accrual mispricing phenomenon observed in previous work is largely due to the mispricing of positive accruals. We find that investors price all positive accruals as if they were informative and that a subset of positive accruals is correctly priced. That is, (1) investors correctly price positive accruals that are likely to be informative because concurrently Insiders engage in abnormal buying, and (2) investors price all positive accruals the same independently of Insider Trading. We find that the extent of the mispricing is greater when positive accruals occur concurrently with abnormal selling relative to cases where there is no Trading. The extent of the mispricing and the magnitude of the one-year ahead returns (14.7 to 22 percent) to a Trading strategy based on positive accruals and abnormal selling suggests that these accruals arise from opportunistic earnings management that is successful in misleading investors. By contrast, the smaller positive accrual mispricing when there is no Insider Trading is more likely related to either the complexity of the firms' accrual generating process (Thomas and Zhang (2001) or to earnings fixation (Sloan 1996). Our evidence thus suggests that opportunistic earnings management is a partial explanation for the accrual mispricing phenomenon.
Mark E Vargus - One of the best experts on this subject based on the ideXlab platform.
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Insider Trading earnings quality and accrual mispricing
The Accounting Review, 2002Co-Authors: Messod Daniel Beneish, Mark E VargusAbstract:This paper investigates whether Insider Trading is informative about earnings quality and the valuation implications of accruals. We show that (1) the one‐year‐ahead persistence of income‐increasing accruals is significantly lower when accompanied by abnormal Insider selling and greater when accompanied by abnormal Insider buying; (2) the accrual mispricing phenomenon observed in previous work (e.g., Sloan 1996) is due to the mispricing of income‐increasing accruals; (3) one‐year‐ahead hedge returns to Trading strategies based on the direction of accruals and Insider Trading significantly exceed those based on accruals alone; and (4) the lower persistence of income‐increasing accruals accompanied by abnormal Insider selling appears to be at least partly attributable to opportunistic earnings management. Our evidence suggests that market participants and researchers can use managers' contemporaneous Trading in ex ante assessing the likelihood that the firms' accruals are of high or low quality, and in asse...
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Insider Trading earnings quality and accrual mispricing
Social Science Research Network, 2001Co-Authors: Mark E Vargus, Messod Daniel BeneishAbstract:The paper provides evidence that the signal contained in Insiders' Trading behavior is useful in making refined assessments of earnings quality, and informative about the valuation implications of accruals. We find that income-increasing accruals and unexpected accruals have lower (higher) persistence when managers engage in abnormal selling (buying) suggesting that Insider Trading information is useful in assessing the quality of the non-cash components of earnings. We show that the accrual mispricing phenomenon observed in previous work is largely due to the mispricing of positive accruals. We find that investors price all positive accruals as if they were informative and that a subset of positive accruals is correctly priced. That is, (1) investors correctly price positive accruals that are likely to be informative because concurrently Insiders engage in abnormal buying, and (2) investors price all positive accruals the same independently of Insider Trading. We find that the extent of the mispricing is greater when positive accruals occur concurrently with abnormal selling relative to cases where there is no Trading. The extent of the mispricing and the magnitude of the one-year ahead returns (14.7 to 22 percent) to a Trading strategy based on positive accruals and abnormal selling suggests that these accruals arise from opportunistic earnings management that is successful in misleading investors. By contrast, the smaller positive accrual mispricing when there is no Insider Trading is more likely related to either the complexity of the firms' accrual generating process (Thomas and Zhang (2001) or to earnings fixation (Sloan 1996). Our evidence thus suggests that opportunistic earnings management is a partial explanation for the accrual mispricing phenomenon.
Timothy C Johnson - One of the best experts on this subject based on the ideXlab platform.
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more Insiders more Insider Trading evidence from private equity buyouts
Social Science Research Network, 2009Co-Authors: Viral V Acharya, Timothy C JohnsonAbstract:This paper studies how Insider Trading intensity is affected by the joint effects of competition and regulation. Prior theoretical research has found that, in the absence of regulation, more Insiders leads to more Insider Trading. We show that optimal regulation, however, features detection and punishment policies that get stricter as the number of Insiders increases, giving rise to lower Insider Trading in equilibrium. We construct measures of the likelihood of Insider activity prior to bid announcements of private equity buyouts during the period 2000-2006 and relate these to the number of financing participants. We find that suspicious stock and options activity is associated with more equity participants, while suspicious activity in bond and CDS markets is associated with more debt participants. These results may be consistent with models of limited competition among Insiders, but are inconsistent with our model of optimal regulation.
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Insider Trading in credit derivatives
Journal of Financial Economics, 2007Co-Authors: Viral V Acharya, Timothy C JohnsonAbstract:Abstract Insider Trading in the credit derivatives market has become a significant concern for regulators and participants. This paper attempts to quantify the problem. Using news reflected in the stock market as a benchmark for public information, we find significant incremental information revelation in the credit default swap market under circumstances consistent with the use of non-public information by informed banks. The information revelation occurs only for negative credit news and for entities that subsequently experience adverse shocks, and increases with the number of a firm's relationship banks. We find no evidence, however, that the degree of asymmetric information adversely affects prices or liquidity in either the equity or credit markets.
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Insider Trading in credit derivatives
Research Papers in Economics, 2005Co-Authors: Viral V Acharya, Timothy C JohnsonAbstract:Insider Trading in the credit derivatives market has become a significant concern for regulators and participants. This paper attempts to quantify the problem. Using news reflected in the stock market as a benchmark for public information, we report evidence of significant incremental information revelation in the credit default swap (CDS) market, consistent with the occurrence of Insider Trading. We show that the degree of this activity increases with the number of banks that have lending/monitoring relations with a given firm, and that this effect is robust to controls for non-informational trade. Furthermore, consistent with hedging activity by informed banks with loan exposure, information revelation in the CDS market is asymmetric, consisting exclusively of bad news. We find no evidence, however, that the degree of Insider activity adversely affects prices or liquidity in either the equity or credit markets. If anything, with regard to liquidity, the reverse appears to be true.
Viral V Acharya - One of the best experts on this subject based on the ideXlab platform.
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more Insiders more Insider Trading evidence from private equity buyouts
Social Science Research Network, 2009Co-Authors: Viral V Acharya, Timothy C JohnsonAbstract:This paper studies how Insider Trading intensity is affected by the joint effects of competition and regulation. Prior theoretical research has found that, in the absence of regulation, more Insiders leads to more Insider Trading. We show that optimal regulation, however, features detection and punishment policies that get stricter as the number of Insiders increases, giving rise to lower Insider Trading in equilibrium. We construct measures of the likelihood of Insider activity prior to bid announcements of private equity buyouts during the period 2000-2006 and relate these to the number of financing participants. We find that suspicious stock and options activity is associated with more equity participants, while suspicious activity in bond and CDS markets is associated with more debt participants. These results may be consistent with models of limited competition among Insiders, but are inconsistent with our model of optimal regulation.
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Insider Trading in credit derivatives
Journal of Financial Economics, 2007Co-Authors: Viral V Acharya, Timothy C JohnsonAbstract:Abstract Insider Trading in the credit derivatives market has become a significant concern for regulators and participants. This paper attempts to quantify the problem. Using news reflected in the stock market as a benchmark for public information, we find significant incremental information revelation in the credit default swap market under circumstances consistent with the use of non-public information by informed banks. The information revelation occurs only for negative credit news and for entities that subsequently experience adverse shocks, and increases with the number of a firm's relationship banks. We find no evidence, however, that the degree of asymmetric information adversely affects prices or liquidity in either the equity or credit markets.
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Insider Trading in credit derivatives
Research Papers in Economics, 2005Co-Authors: Viral V Acharya, Timothy C JohnsonAbstract:Insider Trading in the credit derivatives market has become a significant concern for regulators and participants. This paper attempts to quantify the problem. Using news reflected in the stock market as a benchmark for public information, we report evidence of significant incremental information revelation in the credit default swap (CDS) market, consistent with the occurrence of Insider Trading. We show that the degree of this activity increases with the number of banks that have lending/monitoring relations with a given firm, and that this effect is robust to controls for non-informational trade. Furthermore, consistent with hedging activity by informed banks with loan exposure, information revelation in the CDS market is asymmetric, consisting exclusively of bad news. We find no evidence, however, that the degree of Insider activity adversely affects prices or liquidity in either the equity or credit markets. If anything, with regard to liquidity, the reverse appears to be true.
