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Regulating information flows: Is it just? Insider trading and mandatory-disclosure rules from a free-market perspective

Author

Listed:
  • Enrico Colombatto

    (Università di Torino
    Institut de Recherches Économiques et Fiscales)

  • Valerio Tavormina

    (Università Cattolica del Sacro Cuore)

Abstract

Much of Henry Manne’s work on insider trading emphasised that this practice enhances quick dissemination of information and ultimately efficiency. In this paper, we draw attention to the fact that regulating insider trading encroaches upon the foundations of a free-market economy, and boils down to a question of envy, rather than justice. In particular, there is nothing undesirable, fraudulent or shameful in a process through which selected agents (the insiders) transform dispersed information into specialised knowledge, and make use of it. One may be envious that insiders make a profit or avoid a loss thanks to their privileged position. Yet, insiders do not steal any information and do not violate any property right. Their only constraint is an explicit contractual agreement with their employer. In that case, the government might be required to enforce the contract. Regulation would be illegitimate.

Suggested Citation

  • 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.
    • Handle: RePEc:kap:ejlwec:v:46:y:2018:i:2:d:10.1007_s10657-018-9586-7
    DOI: 10.1007/s10657-018-9586-7
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    References listed on IDEAS

    as
    1. Utpal Bhattacharya & Hazem Daouk, 2002. "The World Price of Insider Trading," Journal of Finance, American Finance Association, vol. 57(1), pages 75-108, February.
    2. 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.
    3. Laura Nyantung Beny, 2005. "Do Insider Trading Laws Matter? Some Preliminary Comparative Evidence," William Davidson Institute Working Papers Series wp741, William Davidson Institute at the University of Michigan.
    4. Hirshleifer, Jack, 1971. "The Private and Social Value of Information and the Reward to Inventive Activity," American Economic Review, American Economic Association, vol. 61(4), pages 561-574, September.
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    6. Leslie A. Jeng & Andrew Metrick & Richard Zeckhauser, 2003. "Estimating the Returns to Insider Trading: A Performance-Evaluation Perspective," The Review of Economics and Statistics, MIT Press, vol. 85(2), pages 453-471, May.
    7. Rose, David C., 2014. "The Moral Foundation of Economic Behavior," OUP Catalogue, Oxford University Press, number 9780199360598.
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    9. Haddock, David D & Macey, Jonathan R, 1987. "Regulation on Demand: A Private Interest Model, with an Application to Insider Trading Regulation," Journal of Law and Economics, University of Chicago Press, vol. 30(2), pages 311-352, October.
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    Cited by:

    1. Robert T. Miller, 2021. "Insider trading and the public enforcement of private prohibitions: some complications in enforcing simple rules for a complex world," European Journal of Law and Economics, Springer, vol. 52(2), pages 307-322, December.

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    More about this item

    Keywords

    Insider trading; Information; Justice; Property rights;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law

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