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The insider trading debate

Author

Listed:
  • Jie Hu
  • Thomas H. Noe

Abstract

Securities trading has generated some of the most sensational scandals in the popular business press. In one of the most publicized cases of insider trading, in the late 1980s Michael R. Milken and Ivan F. Boesky were sentenced to stiff prison terms and payment of enormous damage assessments and punitive penalties. However, at least among economists and legal scholars, insider trading remains a controversial economic transaction. A substantial body of academic and legal scholarship questions whether insider trading is even harmful, much less worthy of legal actions. ; The authors of this article explore the sources of the insider trading controversy and suggest a road map for blending the divergent scholarly opinions into a policy framework for regulating insider trading. They conclude that the divergence of opinion can be attributed primarily to disagreement over which effects of insider trading will have the most significant impacts on economic well-being. The voluminous literature suggests that designing effective policy on insider trading requires a detailed assessment of the structure of the economy, some sensitivity to cultural attitudes toward the appropriateness of such trading activity, and careful consideration of the enforcement costs associated with regulating trade.

Suggested Citation

  • Jie Hu & Thomas H. Noe, 1997. "The insider trading debate," Economic Review, Federal Reserve Bank of Atlanta, vol. 82(Q 4), pages 34-45.
    • Handle: RePEc:fip:fedaer:y:1997:i:q4:p:34-45:n:v.82no.4
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    References listed on IDEAS

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    1. repec:aei:rpbook:53302 is not listed on IDEAS
    2. Noe, Thomas H, 1997. "Insider Trading and the Problem of Corporate Agency," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 13(2), pages 287-318, October.
    3. Keown, Arthur J & Pinkerton, John M, 1981. "Merger Announcements and Insider Trading Activity: An Empirical Investigation," Journal of Finance, American Finance Association, vol. 36(4), pages 855-869, September.
    4. Shin, Jhinyoung, 1996. "The Optimal Regulation of Insider Trading," Journal of Financial Intermediation, Elsevier, vol. 5(1), pages 49-73, January.
    5. Seyhun, H Nejat, 1992. "The Effectiveness of the Insider-Trading Sanctions," Journal of Law and Economics, University of Chicago Press, vol. 35(1), pages 149-182, April.
    6. Leland, Hayne E, 1992. "Insider Trading: Should It Be Prohibited?," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 859-887, August.
    7. Meulbroek, Lisa K, 1992. "An Empirical Analysis of Illegal Insider Trading," Journal of Finance, American Finance Association, vol. 47(5), pages 1661-1699, December.
    8. R. H. Coase, 2013. "The Problem of Social Cost," Journal of Law and Economics, University of Chicago Press, vol. 56(4), pages 837-877.
    9. Dye, Ronald A, 1984. "Inside Trading and Incentives," The Journal of Business, University of Chicago Press, vol. 57(3), pages 295-313, July.
    10. Ausubel, Lawrence M, 1990. "Insider Trading in a Rational Expectations Economy," American Economic Review, American Economic Association, vol. 80(5), pages 1022-1041, December.
    11. Michael J. Fishman & Kathleen M. Hagerty, 1992. "Insider Trading and the Efficiency of Stock Prices," RAND Journal of Economics, The RAND Corporation, vol. 23(1), pages 106-122, Spring.
    12. Michael Manove, 1989. "The Harm from Insider Trading and Informed Speculation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 104(4), pages 823-845.
    13. Bebchuk, Lucian Arye & Fershtman, Chaim, 1994. "Insider Trading and the Managerial Choice among Risky Projects," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 29(1), pages 1-14, March.
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    Citations

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    Cited by:

    1. Jana P. Fidrmuc & Marc Goergen & Luc Renneboog, 2006. "Insider Trading, News Releases, and Ownership Concentration," Journal of Finance, American Finance Association, vol. 61(6), pages 2931-2973, December.
    2. Li, Xiao, 2020. "The impact of economic policy uncertainty on insider trades: A cross-country analysis," Journal of Business Research, Elsevier, vol. 119(C), pages 41-57.
    3. Chowdhury, Abu & Mollah, Sabur & Al Farooque, Omar, 2018. "Insider-trading, discretionary accruals and information asymmetry," The British Accounting Review, Elsevier, vol. 50(4), pages 341-363.
    4. Taylor Smith & Walter E. Block, 2016. "The Economics of Insider Trading: A Free Market Perspective," Journal of Business Ethics, Springer, vol. 139(1), pages 47-53, November.
    5. Yin-Hua Yeh & Pei-Gi Shu & Ya-Wei Yang, 2016. "How Insiders’ Personal Incentives and Timeliness of Information Revelation are Related to Their Sales Timing," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 19(02), pages 1-26, June.
    6. Wei Huang & Bin Qiu, 2022. "Passive insider trading before pension freezes," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 45(3), pages 607-631, September.

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