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Title: The efficacy of regulatory intervention: Evidence from the distribution of informed option trading
Authors: Anderson, R.C.
Reeb, D.M. 
Zhang, Y.
Zhao, W.
Keywords: Informed trading measures
Options market
Selective disclosure
Stochastic dominance
Issue Date: Nov-2013
Citation: Anderson, R.C., Reeb, D.M., Zhang, Y., Zhao, W. (2013-11). The efficacy of regulatory intervention: Evidence from the distribution of informed option trading. Journal of Banking and Finance 37 (11) : 4337-4352. ScholarBank@NUS Repository.
Abstract: A substantive body of equity-market academic research documents an extensive range of costs arising from the SEC's October 2000 adoption of strictures on selective disclosure and insider trading; suggesting an unusual outcome, specifically, an increase in informed trading. We investigate the efficacy of the SEC's regulations by examining informed trading in an attractive setting for exploiting private information; the options market. Using data on the S&P 1500 industrial firms, our analysis indicates that about 38% of firms exhibited symptoms of informed option trading prior to regulatory intervention. After regulatory intervention, we observe that only 19% of firms show symptoms of informed trading. In additional testing of ADR firms - explicitly exempt from complying with Reg FD, we find no evidence of a change in informed option trading from pre- to post-regulation; suggesting that the SEC's strictures on US firms led a to a significant reduction in informed option trading. Notably, our proxies for large shareholder and financial analyst access are associated with the largest decreases in informed option trading. In developing a unique measure of informed trading based on option market data, we provide evidence on the efficacy of security regulation in limiting informed trading. © 2013 Elsevier B.V.
Source Title: Journal of Banking and Finance
ISSN: 03784266
DOI: 10.1016/j.jbankfin.2013.07.037
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