Information asymmetry and insider trading.

Summary The competition between the various European financial markets has been growing since the 1980s and will be reinforced by the changeover to the euro. Each financial center seeks to increase its competitiveness by defining both an optimal system of organization of quotations and an adapted stock exchange regulation. While advocates of insider trading argue that it has a positive impact on efficiency, opponents denounce its negative influence on liquidity. In order to determine the optimal regulation of insider trading, it seems important to study the consequences on the functioning of markets. The regulation of insider trading and the means put in place to avoid it are studied. Despite a change in legislation resulting in a tightening of insider trading regulations, holders of privileged information continue to benefit from their informational advantage. The impact of insider trading on informational efficiency is studied theoretically and empirically. Microstructure models show that the revelation of inside information, held by highly informed investors, is largely limited by noise induced by liquidity shocks and by the strategic behavior adopted by insiders to limit the diffusion of their information. Moreover, the presence of insiders leads to a slowdown in the incorporation of public information into prices. Empirical studies show that only a fraction of the privileged information held by insiders is incorporated into prices. The intervention of insiders leads to an increase in the degree of information asymmetry, a widening of the price range and a decrease in liquidity. An empirical study, carried out on the French equity market, highlights this negative impact of insiders.