Information Networks: Evidence from Illegal Insider Trading Tips

This paper exploits detailed data on illegal insider trading tips to document how information about corporate events diffuses across investors in advance of the public release of news.  I find that information links tend to cluster within age, gender, and small geographic regions.  The majority of information links are based on family and friendships formed during childhood, and a minority is based on professional relationships.  Information travels faster as it moves further from the original source and later tippees earn lower percentage returns, but higher dollar gains. In sum, this paper provides some of the first direct evidence of person-to-person communication in the transmission of information between stock market participants.

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