Competitive Threats, Information Asymmetry, and Insider Trading

This paper provides evidence that intensified product market competition increases information asymmetry between corporate insiders and investors. I use volume and gains from insider trading as proxies for information asymmetry. I show that when a firm faces competitive threats insiders purchase and sell more stocks and their trading better predicts future stock returns and long-term profitability changes. These results hold for several alternative measures of competitive intensity and they are related to the degree of restrictiveness of insider trading regulation. I show that future firm performance turns more idiosyncratic when competition intensifies increasing forecasting relevance of firm-specific information better known to insiders. Furthermore, I provide evidence that firms reduce informativeness of mandatory and voluntary disclosures leaving investors in a disadvantage.