**Main**

Digital Transformation's Impact on Informed Trading

First Subtopic: Theoretical Framework

Informed trading, a phenomenon driven by information asymmetry and market imperfections, manifests differently across markets. Engaged traders possess an advantage in accessing undisclosed information, permitting them to secure substantial excess returns through transactions that often result in financial losses for uninformed traders [1-3]. This tendency to trade with clandestine information is pervasive in both established markets (e.g., the U.S., the UK, Germany) [4-6] and less mature emerging markets, such as China's A-share market, where executives exhibit proficiency in exploiting favorable market conditions for personal gain.Engaging in informed trading not only manipulates prices, impairing market efficiency [7], but also initiates a chain of adverse selection transactions that escalate liquidity concerns and potentially induce market volatility, thereby hindering healthy market expansion [8]. The alarming rise in informed and insider trading poses a considerable threat to investors' rights to information and property ownership, as well as to the market's smooth functioning. Hence, in the contemporary era of rapid digital technology evolution, it becomes imperative to examine the relationship between corporate digital transformation and the prevalence of informed trading behavior.Information, as an economic resource, has the potential to mitigate or eliminate moral hazard and adverse selection within an enterprise. Transparent internal information not only reduces financing costs but also inhibits managers (informed traders) from concealing unfavorable corporate news [9, 10]. Nevertheless, identifying informed trading empirically is challenging because the information sources of informed traders are generally unobservable, and they often disguise their trading activities by concealing these sources [11]. The systemic presence of covert trading practices stems partly from internal control deficiencies within companies, wherein existing managerial agency issues provide opportunities for such concealment [12]. Managers can effortlessly circumvent internal controls over information and communication, exploiting supervision gaps to veil their trading activities, thereby facilitating the suppression of adverse news [13]. Empirical research by the American Loyalty and Guaranty Corporation indicates that most corporate bankruptcies stem from ineffective internal controls [14]. Deficiencies in internal control within firms often manifest as irrational organizational structures and opaque distributions of authority and responsibility, enabling individuals to bypass organizational rules. This can lead to opaque corporate governance, inefficient information communication, and facilitated transaction concealment [15]. Furthermore, companies with less effective internal control systems grant managers greater operational autonomy, making it easier for informed traders (managers or related subjects) to obscure their activities [16].Another reason for the tendency of informed traders to conceal their activities is the information advantage they possess. The exclusivity of information varies; it can be public market information, which is non-exclusive, or it can derive from specialized private channels that offer significant exclusivity in terms of access, costs, and benefits [17]. Uninformed traders lacking access to private information channels may consider purchasing this information, thereby becoming informed traders [18]. However, in emerging markets, higher information search costs discourage market participants from extracting profitable, firm-specific information [19]. These constraints on information transmission channels and associated costs create disparities in information access among market participants. Consequently, managers with the prerogative for abnormal operations are more likely to access differential information and engage in informed trading.The process of information dissemination from generation to full assimilation by the market encompasses both the spread of relatively objective information across markets and the precise comprehension of relatively subjective information content by individuals [20], i.e., the degree of information disclosure and the accuracy of information expectations. Increasing the availability of public information in the market enhances price discovery, diminishes the significance of private information, and directs the rational allocation of resources, thereby reducing the likelihood of informed trading [18]. Moreover, augmented public information decreases the uncertainty of equity financing for firms and lowers the expense of acquiring private information for general traders [21]. Stringent disclosure requirements, serving as a pivotal mechanism for public information dissemination, can lessen discrepancies among market participants, improve the regulatory efficacy of authorities, curb the opportunistic actions of financial professionals (informed traders), and bolster the relative fairness of information in market transactions. Thus, information disclosure is pivotal to the interests of numerous investors and reflects market fairness and efficiency [22].The accuracy of information predictions primarily stems from the expertise of the predictor and their access to private information. Due to the substitution effect between public and private information [23], an information disclosure system or technology can facilitate the conversion of private information into public information and enhance the level of disclosure [24]. Although information disclosure does not necessarily improve the situation for all investors in a firm [25, 26], it can reduce the proportion of private information, amplify the impact of public information on the market price discovery mechanism [27], and encourage market participants to focus more on public information and enhance their analytical capabilities.From the perspective of external factors, technological advancements and data-driven initiatives within the digital economy enhance the quality of information disclosure, which is influenced by the channels through which it is disseminated. Leveraging digital technology, enterprises can standardize information output, potentially improving the quality of market information disclosure.