Fragmented Securities Regulation, Information-Processing Costs, and Insider Trading

Abstract

Using a unique setting where stand-alone banks submit filings to bank regulators instead of the SEC, we examine the consequences of fragmented securities regulation on information-processing costs and opportunistic insider trading. We find the market reaction to insider-trading filings on FDICconnect is less timely than to those on SEC EDGAR, suggesting FDICconnect generates higher information-processing costs. We also find only large investors trade more on insider-trading filings on FDICconnect than on those on SEC EDGAR, thus extracting benefits from the delayed market reaction to insider-trading filings on FDICconnect. Finally, we find increased insider selling in stand-alone banks prior to public announcements of banks’ enforcement actions and negative earnings news, suggesting insiders’ opportunistic use of private information. These findings collectively suggest regulatory fragmentation undermines market efficiency and distorts the level playing field.