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Strategic insider trading: Disguising order flows to escape trading competition

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journal contribution
posted on 2021-06-07, 08:30 authored by Dingwei Gu, Xin Liu, Hanwen Sun, Huainan ZhaoHuainan Zhao
Short sellers actively exploit trading opportunities from insider sales. We argue that, in response to concern about potential order flow information leakage, insiders strategically disguise their order flows to escape trading competition. Our model predicts that, when short sellers are sensitive to order flow information, insiders are more likely to adopt a cautious trading strategy, i.e., splitting their trades over time. Empirically, we identify cautious trading by tracking consecutive transactions at the insider-strategy level. We find that, when anticipating intensive short selling potential, (1) insiders tend to trade cautiously; and (2) cautious insiders tend to reduce their initial trades. Overall, we highlight the strategic interaction between insiders and short sellers on the diffusion of order flow information.

History

School

  • Business and Economics

Department

  • Business

Published in

Journal of Corporate Finance

Volume

67

Publisher

Elsevier

Version

  • AM (Accepted Manuscript)

Rights holder

© Elsevier

Publisher statement

This paper was accepted for publication in the journal Journal of Corporate Finance and the definitive published version is available at https://doi.org/10.1016/j.jcorpfin.2021.101891

Acceptance date

2021-01-06

Publication date

2021-01-08

Copyright date

2021

ISSN

0929-1199

Language

  • en

Depositor

Prof Huainan Zhao. Deposit date: 5 June 2021

Article number

10.1016/j.jcorpfin.2021.101891

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