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Information Trading in Networks

Paper Session

Sunday, Jan. 5, 2020 1:00 PM - 3:00 PM (PDT)

Manchester Grand Hyatt, Seaport G
Hosted By: American Finance Association
  • Chair: Zhiguo He, University of Chicago

Insider Networks

Selman Erol
,
Carnegie Mellon University
Michael Lee
,
Federal Reserve Bank of New York

Abstract

How do insiders respond to regulatory oversight? History suggests that they form sophisticated networks to share information and circumvent regulation. We develop a theory of the formation and regulation of information transmission networks. We show that agents with sufficiently complex networks bypass any given regulatory environment. In response, regulators employ broad regulatory boundaries to combat gaming, giving rise to regulatory ambiguity. Tighter regulation induces agents to migrate transmission activity from existing social networks to a core-periphery insider network. A small group of agents endogenously arise as intermediaries for the bulk of information. We provide centrality measures that identify intermediaries.

Social Interaction and Market Reaction to Earnings News

David Hirshleifer
,
University of California-Irvine
Lin Peng
,
City University of New York-Baruch College
Qiguang Wang
,
Hong Kong Baptist University

Abstract

Using Facebook social connectivity to identify the network centrality of firms’ headquarters, we study how information propagates through social network and affects asset prices. We find that earnings announcements made by central firms attract more attention from both retail and institutional investors, generate stronger immediate reactions in prices, trading volume and return volatility, and weaker post announcement drifts. In addition, these announcements are followed by less persistent volatility but more persist investor attention and volume, especially disagreement-driven volume. Our evidence suggests a dual role of social interaction: it promotes information efficiency by facilitating public information diffusion, but also induces investor disagreement and excess trading volume.

Price Revelation from Insider Trading: Evidence from Hacked Earnings News

Pat Akey
,
University of Toronto
Vincent Gregoire
,
HEC Montreal
Charles Martineau
,
University of Toronto

Abstract

Over six years, a group of convicted traders accessed upcoming earnings press releases hours before the official announcement through a series of cyber intrusions into the main newswire services. This setting allows us to investigate how efficient are markets at learning about insider's private information and which stocks are more susceptible to insider trading. Pre-announcement stock returns of firms exposed to hacks predict earnings surprises. Also, the after-hours return responsiveness to surprises decreases by 20%. The effects is predominantly found in medium-sized firms, on days with a high number of earnings announcements, and for large surprises.

Liquidity Versus Information Efficiency

Sergei Glebkin
,
INSEAD

Abstract

I analyse liquidity, information efficiency and welfare in a market with large and small traders. Large traders create noise in the price for small traders, and vice versa, due to private value differences across the two groups. More liquidity induces large traders to trade more aggressively, creating more noise for small traders; less informative prices, in turn, incite small traders to provide more liquidity. Implications of this interaction are twofold: (i) an increase in competition between large traders may make all traders worse-off, (ii) an increase in the quality of private information may reduce information efficiency.
Discussant(s)
Ana Babus
,
Washington University-St. Louis
Asaf Manela
,
Washington University-St. Louis
Emiliano Pagnotta
,
Imperial College London
Eduardo Davila
,
Yale University
JEL Classifications
  • G1 - General Financial Markets