Date of Graduation

12-2020

Document Type

Dissertation

Degree Name

Doctor of Philosophy in Business Administration (PhD)

Degree Level

Graduate

Department

Accounting

Advisor/Mentor

Kristian Allee

Committee Member

Vernon Richardson

Second Committee Member

Cory Cassell

Keywords

Hedge Funds, Insider Trading, Newman, Private Information, Regulation

Abstract

I exploit a shock to U.S. insider trading law to investigate whether a reduction in the enforceability of tipper-tippee insider trading restrictions leads to changes in information parity among investors and the efficiency of price discovery. The December 2014 Federal Second Circuit Court of Appeals ruling in US v. Newman constrained enforcement by restricting the types of exchanges between managers and investors that trigger tipper-tippee insider trading liability. Following Newman, I find that Second Circuit hedge funds experienced a significant increase in their stock picking ability of Second Circuit stocks in terms of preempting future earnings announcement returns and future earnings surprises; this is consistent with Newman having a differential effect on market participants as the ruling represented binding precedent only within the jurisdictional boundaries of the Second Circuit. I also find evidence that the suspect trading activity of Second Circuit hedge funds led to improved market efficiency in the Second Circuit, as evidenced by tests that approximate the speed of price discovery between quarterly earnings announcement cycles of portfolio firms. This study extends prior work by documenting the relation between important aspects of capital market activity and tipper-tippee insider trading law.

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