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Regulating Insider Trading When Investment Matters

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  • Luis Angel Medrano
  • Xavier Vives

Abstract

We provide a general framework for analyzing the effects of insider trading on real investment and welfare as well as the consequences of different regulatory policies in a model where all traders are rational expected-utility maximizers and aware of their position in the market. We find that: with costly information acquisition, an "abstain-or-disclose" rule tends to be optimal; with free information acquisition, laissez-faire is better. This suggests enforcing an abstain-or-disclose rule with a high standard of proof for inside information. Our approach also uncovers the pitfalls of welfare analysis in the noise-trader model.

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Bibliographic Info

Article provided by Springer in its journal European Finance Review.

Volume (Year): 8 (2004)
Issue (Month): 2 ()
Pages: 199-277

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Handle: RePEc:kap:eurfin:v:8:y:2004:i:2:p:199-277

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Web page: http://springerlink.metapress.com/link.asp?id=111870

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  1. Repullo, R., 1994. "Some Remarks on Leland's Model of Insider Trading," Papers 9425, Centro de Estudios Monetarios Y Financieros-.
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  3. Sarkar Asani, 1994. "On the Equivalence of Noise Trader and Hedger Models in Market Microstructure," Journal of Financial Intermediation, Elsevier, vol. 3(2), pages 204-212, March.
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  17. Demsetz, Harold, 1986. "Corporate Control, Insider Trading, and Rates of Return," American Economic Review, American Economic Association, vol. 76(2), pages 313-16, May.
  18. Utpal Bhattacharya & Hazem Daouk, 2002. "The World Price of Insider Trading," Journal of Finance, American Finance Association, vol. 57(1), pages 75-108, 02.
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