Options
The Marginal Incentive of Insider Trading: An Economic Reinterpretation of the Case Law
Journal
The University of Memphis Law Review
ISSN
1080-8582
Type
journal article
Date Issued
2006
Author(s)
Grechenig, Kristoffel
Abstract
Commentators on insider trading are divided into two camps, one in favor of regulation, the other in favor of deregulation. The pleadings for the two positions are manifold but not irreconcilable. We show that important gains to social welfare come with insider trading on negative information (sales), whereas losses often result from the use of positive information (purchases). Thus, we look at a regulation that allows insiders to use negative but not positive non-public information. Because positive information will be disclosed much sooner than negative information, the marginal incentive (and marginal gain to social welfare, respectively) of insider trading as a disclosure mechanism is greater for sales than for purchases. Likewise, stock bubbles generally occur in terms of overvaluations, not undervaluations, emphasizing the importance of insider trading on negative information as a deterrent. The case law on insider trading has long since recognized the distinction between the two types of information, a fact that commentators have either neglected or criticized. A reinterpretation allows us to reconcile presumed contractions of the case law. Our analysis also explains empirical data suggesting that insider trading involves more selling than buying, while enforcement actions focus on purchasing activity.
Project(s)
Language
English
Keywords
insider trading
information asymmetry
stock bubbles
herding
disclosure duties
Dirks
O'Hagan
HSG Classification
contribution to scientific community
Refereed
No
Publisher
HeinOnline
Publisher place
Memphis, Tenn.
Volume
37
Number
1
Start page
75
End page
148
Pages
74
Subject(s)
Division(s)
Eprints ID
39307