Another Welfare Effect of Insider Trading? An Empirical Analysis of Insider Trading Around Seasoned Equity Offering in Japan

While it is well known that insider trading transfers wealth from uninformed market participants to informed insiders, it is not obvious whether insider trading bring welfare effect. This paper explores an answer to this issue, employing stock trading data around SEO in Japan. An announcement of SEO usually decreases the stock price of the issuing company, creating an opportunity for insiders to sell short before the announcement and to make benefit. If this short sale before the announcement lowers the final offering price, the insider trading reduced the financing amount of the issuing company and we can say that the insider trading caused a welfare loss. The paper tests whether this prediction holds employing Japanese stock market data. The paper does not find welfare loss caused by insider trading around SEO.