52 Pages Posted: 10 Sep 2013 Last revised: 13 Oct 2019

Date Written: September 26, 2019

Abstract

By exploiting the exogenous reductions of analyst coverage due to closures and mergers of brokerage firms, I examine the causal impact of information asymmetry on insider trading. I find that corporate insiders’ abnormal returns increase sharply after coverage reductions. This effect is stronger for opportunistic insiders, in time periods with weaker regulatory enforcement, and when the exiting analysts are of higher quality. Insiders from liquid firms also trade more aggressively after coverage reductions. My paper highlights the role of information asymmetry as a crucial determinant of insiders’ abnormal profits and trading behavior, and provides empirical support for informed trading models.