Can Short-term Institutional Investors Curb Insider Trading?

Abstract

Abstract:

Can short-term institutional investors curb insider trading? There is no consensus of opinions in the academic. On the basis of scientifically defining the trade subject in stock market, this paper establishes a two-stage trading dynamic game model that involves short-term insider traders, institutional investors and noise traders and then solves its refined Nash equilibrium of the sub-game with the backward induction method. At the same time, the determinants of the equilibrium solution are simulated and verified. The results show that the short-term institutional investors can have a limited inhibitory effect on insider trading. When the short-term institutional investors' information acquisition and judgment ability improves and exceeds a certain threshold, the profit of insider trading will reduce, and the inhibitory effect will arise. When the number of short-term institutional investors increases, the profit of insider trading will decrease, and the inhibitory effect will arise, but there is a diminishing marginal inhibitory effect. In this way, the simple institutionalization of the investors does not curb necessarily and spontaneously the insider trading, and the rise of the rational level of the short-term institutional investors is the key to curbing insider trading.

Key words: short-term institutional investors, insider trading, rational level

Wang Shuqiang, Liang Nian, Chen Yiqi, Meng Di. Can Short-term Institutional Investors Curb Insider Trading?[J]. , 2020, 32(5): 26-41.

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