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 U.S. Securities and Exchange Commission (SEC), we examine the consequences of fragmented securities regulation for 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’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system, suggesting FDICconnect generates higher information-processing costs. We also find only large investors trade more on insider-trading filings on FDICconnect than on insider-trading filings 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 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. This paper was accepted by Suraj Srinivasan, accounting. Funding: This work was supported by the Eugene Lang Junior Faculty Fellowship. Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2023.4903 .