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Capital-market effects of tipper-tippee insider trading law: Evidence from the Newman ruling

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  • Pierce, Andrew T.

Abstract

This study examines the capital-market effects of tipper-tippee insider trading laws. To do so, I exploit the unexpected decision issued by the Court of Appeals for the Second Circuit in U.S. v. Newman 773 F.3d 438, which reduced legal jeopardy for Second Circuit-based market participants prior to being overturned. Consistent with Newman constraining insider trading enforcement, I find strong evidence of plausible insider trading in the Second Circuit following the ruling. I also document a substantial reduction in general trading activity in Second Circuit stocks, as well as an increase in daily quoted spreads and the price impact of trading. These findings are consistent with unchecked insider trading increasing transaction costs and crowding-out investors. In total, my results show that tipper-tippee insider trading restrictions play an important role in bolstering market integrity, and that market participants can to some degree counteract insider trading when public regulation is constrained.

Suggested Citation

  • Pierce, Andrew T., 2024. "Capital-market effects of tipper-tippee insider trading law: Evidence from the Newman ruling," Journal of Accounting and Economics, Elsevier, vol. 77(2).
    • Handle: RePEc:eee:jaecon:v:77:y:2024:i:2:s0165410123000630
    DOI: 10.1016/j.jacceco.2023.101639
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    More about this item

    Keywords

    Insider trading; Newman ruling; Market integrity; Adverse selection;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation

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