Discussion Paper Details

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Title: Becker Meets Kyle: Inside Insider Trading

Author(s): Marcin Kacperczyk and Emiliano Pagnotta

Publication Date: August 2019


Programme Area(s): Financial Economics

Abstract: How do illegal insiders trade on private information? Do they internalize legal risk? Using hand-collected data on insiders prosecuted by the SEC, we find that, consistent with Kyle (1985), insiders manage trade size and timing according to market conditions and the value of information. Gender, age, and profession play a lesser role. Various shocks to penalties and likelihood of prosecution show that insiders internalize legal risk by moderating aggressiveness, providing support to regulators' deterrence ability. Consistent with Becker (1968), following positive shocks to expected penalties, insiders concentrate on fewer signals of higher value. Thus, enforcement actions could hamper price informativeness.

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Bibliographic Reference

Kacperczyk, M and Pagnotta, E. 2019. 'Becker Meets Kyle: Inside Insider Trading'. London, Centre for Economic Policy Research.