informed trading in regulated industries
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Informed Trading in Regulated Industries
David M. Reeb, Yuzhao Zhang and Wanli Zhao
Discussion by Ko-Chia Yu
Shanghai University of Finance and Economics
2012 NTU ICF
The bigger picture
Why do governments regulate? To gain control over a certain strategically important
sector.
Shareholder protection Monitoring of wrong doing of corporate insiders
Limit the information leakage of the insiders
The bigger picture Summary of the results:
The very act of governmental intervention might lead to more passages for informational leakage.
Additional “insiders” are generated in the monitoring process. Regulator
s
Summary of Findings A very long list of evidence that includes:
Potential avenues for informed trading Short-sales Equity sales and/or purchases Option market
Potential informational leakage events Abnormal short-sales before earning shocks
Natural Experiments 1978 Airline deregulation 1980 Trucking deregulation 1999 Gramm-Leach-Bliley Act (again a deregulation,
banking industry)
Summary of Findings
Identification of the channels (Bank industry) Timing of informational flows
Call report to the regulators by the end of every calendar quarter
Gone public 40 days later Reaction in the first 20 days of the reports
Federal vs. State supervision Duplicity increases informed trading.
Political integrity Interaction between corruption index and supervision
Overall Impression
Very comprehensive and well structured Convincing and very interesting natural experiments
results Many different takeaways and possible interpretations
of the results Highly unlikely for me to pick up any significant flaw to
the contents of the arguments
Potential Avenues for Informed Trading
Alternative interpretations of the results Regulation provides another channel of information
leakage thus generate more “pseudo-insiders.” Do they mitigate the extent of trading from the true
insiders? “Opportunistic trade” variable from Cohen et. al
(2010) is included It is still interesting to see how insider trading
interacts with the regulator-insider trading
Potential Avenues for Informed Trading
Steele (1989) model: information leakage as the square of the number of people who have access to the information
Would the results (the mass data sample on short-sales, equity and the option markets)be driven by the fact that these industries (finance, utilities, and pharmaceuticals) consist of more people with valuable insider information about the industry? E.g. A pharmaceutical researcher will likely have the same
information (possibly better information) than an analyst studying on the firm.
Suggestion: average employee salary (NBER data)
Potential Avenues for Informed Trading
Short-sale market Predictability is significantly better for regulated industries
than non-regulated industries However it is not clear that this predictability can be
attributed to informed traders or liquidity providers (opportunistic or not). Diether et al (2007): reversal
Short-sale constraints Non-transient institutional ownership, index fund
ownership (Bushee 1998, among others)
Potential Avenues for Informed Trading
Equity market Adjusted-PIN Liquidity-PS is controlled. The asymmetric information part of PIN as in Duarte and
Young (2009)
Other comments
What about other regulatory changes? Other supervised firms?
Telecomm?
Supervision and regulation (more supervision than regulation, but it is the regulator who conducts the regulatory supervision)
Cost of getting caught seems to be low. (?)
Minor Issues
Table 6 “Regulatory duplicity” got truncated Punctuation: “Although, …” in several places Table 9
Citation update: Adams, R. B., & Ferreira, D. (2012). Regulatory pressure and bank directors incentives to attend �board meetings. International Review of Finance, 12(2), 227-248.
Conclusion
The research has a different takeaway for different people.
I really do enjoy reading the paper. Good luck to the authors!
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