Insider Trading in Supervised Industries

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We investigate the impact of government agency oversight, such as by the Federal Reserve, on insider trading at the firm level. Regulatory supervision potentially limits trading based on material, nonpublic information, as it provides another layer of corporate governance to mitigate outflows of private information. Yet regulators themselves may serve as a source of information leakage, thereby facilitating insider-trading activity. We find, first, that in comparison to nonsupervised firms, supervised firms exhibit substantially greater trading based on inside information prior to earnings announcements. Second, in the first few days after firms provide private information to regulators or when regulators possess private information inaccessible to corporate insiders, these firms exhibit greater symptoms of insider trading. Finally, within a given supervised industry, insider-trading symptoms appear more pronounced when regulators exhibit greater leniency or operate in states with more political corruption. These insider-trading activities translate into over $1 billion in annual transfers.

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