Insider Trading Restrictions and Informed Trading in Peer Stocks

Using a uniquely constructed dataset of trades by corporate insiders in all stocks, we find that, after insider trading regulations become stricter, insiders are 20% more likely to trade in peer stocks 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. Stricter insider trading laws are designed to improve liquidity and price informativeness in capital markets. We show that peer trading dampens these intended benefits of the insider trading regulation.