Publication Type

Journal Article

Publication Date

3-2014

Abstract

Empirical evidence suggests that information leakage in capital markets is common. We present a trading model to study the incentives of an informed trader (e.g., a well informed insider) to voluntarily leak information about an asset's value to one or more independent traders. Our model shows that, while leaking information dissipates the insider's information advantage about the asset's value, it enhances his information advantage about the asset's execution price relative to other informed traders. The profit impact of these two effects are countervailing. When there are a sufficient number of other informed traders, the profit impact from enhanced information dominates. Hence, the insider has incentives to leak some of his private information. We label this rational information leakage and discuss its implications for the regulation of insider trading.

Keywords

Information leakage, insider trading, securities regulations

Discipline

Management Information Systems

Research Areas

Corporate Reporting and Disclosure

Publication

Management Science

Volume

60

Issue

11

First Page

1

Last Page

33

ISSN

0025-1909

Identifier

10.1287/mnsc.2014.1975

Publisher

INFORMS (Institute for Operations Research and Management Sciences)

Additional URL

http://doi.org./10.1287/mnsc.2014.1975

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