Fragmented Securities Regulation, Information-Processing Costs, and Insider Trading.

This article investigates the effects of fragmented securities regulation on information-processing costs and insider trading by comparing stand-alone banks, which file insider-trading disclosures with federal bank regulators via FDICconnect, to bank holding companies, which file with the U.S. Securities and Exchange Commission (SEC) through the EDGAR system. The study finds that market reactions to insider-trading filings on FDICconnect are significantly less timely and smaller in the short run than reactions to filings on SEC EDGAR, indicating higher information-processing costs associated with FDICconnect. Large institutional investors, but not retail investors, appear to benefit from this delayed market reaction by trading more on FDICconnect filings, suggesting a distortion of the level playing field. Additionally, insiders at stand-alone banks engage in more opportunistic selling prior to negative earnings announcements, implying that fragmented regulation may facilitate the exploitation of private information. Overall, the findings highlight that regulatory fragmentation undermines market efficiency and fairness by increasing information-processing costs and enabling opportunistic insider behavior.