Disclosure of Mutual Fund Holdings and Insider Trading Profitability

• In Event: Disclosure and Asset Pricing

Abstract

Using a difference-in-differences design, we find that the passage of an SEC Regulation in May 2004 that increased the frequency of mandated reporting for mutual funds increases the profitability of insider trades. Cross-sectional analyses suggest that this increase in trading profits for insiders is due to mutual funds’ reduced incentives to collect costly firm-specific information following the regulation. We do not find evidence for the effect to be driven by liquidity changes or changes in the opportunities for insiders to learn from the fund disclosures. Our study suggests that mandated disclosure requirements on outside investors can have unintended consequences of increasing profits for informed insiders.

Authors

• Tathagat Mukhopadhyay, Leeds School of Business, University of Colorado

• Karthik Balakrishnan, London Business School

• Lakshmanan Shivakumar, London Business School