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Why Regulate Insider Trading? Evidence from the First Great Merger Wave (1897-1903)

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  • Ajeyo Banerjee
  • E. Woodrow Eckard

Abstract

We use event-time methodology to study legal insider trading associated with mergers circa 1900. For mergers with "prospective" disclosures similar to today's, we find substantial value gains at announcement, implying participation by "outside" shareholders despite the absence of insider constraints. Furthermore, preannouncement stock-price runups, relative to total value gain, are no more than those observed for modern mergers. Insider regulation apparently has produced little benefit for outsiders, with the inside information-pricing function and related gains shifting to external "information specialists." Other results suggest market penalties for nondisclosure; i.e., insider trading is less successful in a restricted information environment.

Suggested Citation

  • Ajeyo Banerjee & E. Woodrow Eckard, 2001. "Why Regulate Insider Trading? Evidence from the First Great Merger Wave (1897-1903)," American Economic Review, American Economic Association, vol. 91(5), pages 1329-1349, December.
    • Handle: RePEc:aea:aecrev:v:91:y:2001:i:5:p:1329-1349
    Note: DOI: 10.1257/aer.91.5.1329
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    6. Cziraki, P. & de Goeij, P. C. & Renneboog, L.D.R., 2010. "Insider Trading, Option Exercises and Private Benefits of Control (Revision of DP 2010-32)," Discussion Paper 2010-90, Tilburg University, Center for Economic Research.
    7. Akbas, Ferhat & Meschke, Felix & Wintoki, M. Babajide, 2016. "Director networks and informed traders," Journal of Accounting and Economics, Elsevier, vol. 62(1), pages 1-23.
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    11. Cziraki, P. & de Goeij, P.C. & Renneboog, L.D.R., 2014. "Corporate governance rules and insider trading profits," Other publications TiSEM 4678560b-6867-43cc-91d2-b, Tilburg University, School of Economics and Management.
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    13. Gerhard Kling, 2008. "Disclosure of mergers without regulatory restrictions: Insider trading in pre-1914 Germany," Economics Bulletin, AccessEcon, vol. 7(2), pages 1-7.
    14. Aaron Gilbert & Alireza Tourani-Rad, 2008. "The Impact of Regulations on the Informational Basis of Insider Trading," Australian Journal of Management, Australian School of Business, vol. 33(2), pages 407-435, December.
    15. Fabio Braggion & Lyndon Moore, 2013. "How insiders traded before rules," Business History, Taylor & Francis Journals, vol. 55(4), pages 565-584, June.
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    18. Białkowski, Jędrzej & Etebari, Ahmad & Wisniewski, Tomasz Piotr, 2012. "Fast profits: Investor sentiment and stock returns during Ramadan," Journal of Banking & Finance, Elsevier, vol. 36(3), pages 835-845.
    19. Enrico Colombatto & Valerio Tavormina, 2018. "Regulating information flows: Is it just? Insider trading and mandatory-disclosure rules from a free-market perspective," European Journal of Law and Economics, Springer, vol. 46(2), pages 205-221, October.
    20. Wisniewski, Tomasz P. & Bohl, Martin T., 2005. "The Information Content of Registered Insider Trading Under Lax Law Enforcement," International Review of Law and Economics, Elsevier, vol. 25(2), pages 169-185, June.
    21. Hauser, Florian & Schredelseker, Klaus, 2018. "Who benefits from insider regulation?," The Quarterly Review of Economics and Finance, Elsevier, vol. 68(C), pages 203-210.
    22. Yang, Yung Chiang & Zhang, Bohui & Zhang, Chu, 2020. "Is information risk priced? Evidence from abnormal idiosyncratic volatility," Journal of Financial Economics, Elsevier, vol. 135(2), pages 528-554.
    23. Lübbers, Thorsten, 2008. "Shareholder value mining: Wealth effects of takeovers in German coal mining, 1896-1913," Explorations in Economic History, Elsevier, vol. 45(4), pages 462-476, September.
    24. Nakabayashi, Masaki, 2019. "Ownership structure and market efficiency," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 61(C), pages 189-212.

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    More about this item

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • N21 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: Pre-1913
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • N81 - Economic History - - Micro-Business History - - - U.S.; Canada: Pre-1913

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