The efficacy of regulatory intervention: Evidence from the distribution of informed option trading |
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Authors: | Ronald C. Anderson David M. Reeb Yuzhao Zhang Wanli Zhao |
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Affiliation: | 1. Fox School of Business, Temple University, Philadelphia, PA 19122, United States;2. National University of Singapore, Singapore 119245, Singapore;3. Spears School of Business, Oklahoma State University, Stillwater, OK 74078, United States;4. College of Business, Southern Illinois University, Carbondale, IL 62901, United States |
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Abstract: | A substantive body of equity-market academic research documents an extensive range of costs arising from the SEC’s October 2000 adoption of strictures on selective disclosure and insider trading; suggesting an unusual outcome, specifically, an increase in informed trading. We investigate the efficacy of the SEC’s regulations by examining informed trading in an attractive setting for exploiting private information; the options market. Using data on the S&P 1500 industrial firms, our analysis indicates that about 38% of firms exhibited symptoms of informed option trading prior to regulatory intervention. After regulatory intervention, we observe that only 19% of firms show symptoms of informed trading. In additional testing of ADR firms – explicitly exempt from complying with Reg FD, we find no evidence of a change in informed option trading from pre- to post-regulation; suggesting that the SEC’s strictures on US firms led a to a significant reduction in informed option trading. Notably, our proxies for large shareholder and financial analyst access are associated with the largest decreases in informed option trading. In developing a unique measure of informed trading based on option market data, we provide evidence on the efficacy of security regulation in limiting informed trading. |
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Keywords: | G14 G32 G38 |
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