Insider Trading Restrictions and Informed Trading in Peer Stocks

After insider trading regulations become stricter, insiders partially substitute trades in their own stocks with informed trades in peer stocks. Using a uniquely constructed dataset of trades by corporate insiders in all stocks, we find that insiders are 20% more likely to trade in peer stocks following the change and that such trades become more profitable. The increase in both the probability and profitability of peer-stock trades is driven by the insider’s information that is fungible to industry peers. Finally, peer trading dampens improvements in liquidity and price informativeness, the intended benefits of the insider trading regulation