Information Transfer, Rent Extraction and Insider Trading ― Who Internalised the Private Information Externality?

We examine corporate insider transactions around Sarbanes-Oxley §403 (SOX) regulatory regimes and subsequent Wall Street Journal (WSJ) media postings — and provide new evidence on the benefit/cost trade-off tension between private information transfer and stock trading costs. SOX increased abnormal returns for insiders in conjunction with market-maker induced higher trading costs — reversed after WSJ posting of Form 4. The highest trade-off impact was clustered around purchases by non-executive directors and intangible rich firms. We reject the notion that SOX provided an information externality to outside investors from accelerated reporting of insider profitability. Our alternative explanation is an (unintended) internal information externality to less informed non-executive directors (per Fishman and Hagerty 1995) at the expense of increased trading costs to outside investors (per Leland 1992). Highlighted are cost trade-offs from regulations intended to address investor information asymmetry, and the incremental role the media plays in disseminating second hand and pre-trading private information