Abstract

This paper exploits a novel hand-collected dataset to provide a comprehensive analysis of the social relationships that underlie illegal insider trading networks. I find that inside information flows through strong social ties based on family, friends, geographic proximity, and ancestry. On average, inside tips originate from corporate executives and reach buy-side investors after three links in the network. Inside traders earn prodigious returns of 35% over 21 days, with traders farther from the original source earning lower returns, but higher dollar gains. More broadly, this paper provides some of the only evidence on information networks that employs direct observations of person-to-person communication.