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Title:Three essays on informed trading
Author(s):Gao, Meng
Director of Research:Almeida, Heitor
Doctoral Committee Chair(s):Almeida, Heitor
Doctoral Committee Member(s):Weisbenner, Scott; Kronlund, Mathias; Wu, Yufeng
Department / Program:Finance
Degree Granting Institution:University of Illinois at Urbana-Champaign
Subject(s):Performance-based pay
Executive compensation
Insider trading
Regression discontinuity
Information production
Informational efficiency
Individual investors
Financial analysts
Hedge funds
Informed trading
Information transfer
Abstract:My Ph.D. dissertation consists of three essays and focuses on informed trading by various economic agents. The first essay provides causal evidence that compensation shocks due to missing relative performance goals prompts more opportunistic insider trading. I use a regression discontinuity design to identify the effect of missing relative performance goals on insider trading. I find that CEOs who narrowly miss relative performance goals and hence receive a lower pay earn higher abnormal profits from their insider trades subsequent to the compensation shock than otherwise similar CEOs who narrowly beat the goals. I also find that CEOs who narrowly miss relative performance goals become less likely to provide earnings and sales guidance. These results suggest that managers can use insider trading to make up for the loss in compensation due to missing relative performance goals, which could reduce the incentive effect of performance-based pay. The second essay, coauthored with Jiekun Huang, identifies the effect of the implementation of the EDGAR system on information production by market participants. Modern information technologies have fundamentally changed how information is disseminated in financial markets. Using the staggered implementation of the EDGAR system from 1993 to 1996 as a shock to information dissemination technologies, we find evidence that internet dissemination of corporate disclosures increases information production by corporate outsiders. Trades by individual investors, especially those with access to the internet, become more informative about future stock returns following the EDGAR implementation. The amount and accuracy of information produced by sell-side analysts increase after the implementation. These results suggest that greater and broader information dissemination facilitated by modern information technologies improves information production. The third essay, coauthored with Jiekun Huang, shows that connections to lobbyists enable hedge funds to trade more profitably in stocks that are more sensitive to political news. This essay examines the hypothesis that hedge fund managers gain an informational advantage in securities trading through their connections with lobbyists. Using data sets on the long-equity holdings and lobbyist connections of hedge funds from 1999 through 2012, we show that hedge funds outperform passive benchmarks by 56–93 basis points per month on their political holdings when they are connected to lobbyists. Furthermore, the political outperformance of connected funds decreased significantly after the Stop Trading on Congressional Knowledge (STOCK) Act became effective. Our study provides evidence on the transmission of political information in financial markets and on the value of such information to financial market participants.
Issue Date:2020-04-28
Rights Information:Copyright 2020 Meng Gao
Date Available in IDEALS:2020-08-27
Date Deposited:2020-05

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