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Insider Trading and the Efficiency of Stock Prices

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Author Info
Michael J. Fishman
Kathleen M. Hagerty
Abstract

We analyze several aspects of the debate on insider trading regulations. Critics of such regulations cite various benefits of insider trading. One prominent argument is that insider trading leads to more informationally efficient stock prices. We show that under certain circumstances, insider trading leads to less efficient stock prices. This is because insider trading has two adverse effects on the competitiveness of the market: it deters other traders from acquiring information and trading, and it skews the distribution of information held by traders toward one trader. We also discuss whether shareholders of a firm have the incentive to restrict insider trading on their own.

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File URL: http://links.jstor.org/sici?sici=0741-6261%28199221%2923%3A1%3C106%3AITATEO%3E2.0.CO%3B2-G&origin=repec
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Publisher Info
Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 23 (1992)
Issue (Month): 1 (Spring)
Pages: 106-122
Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Handle: RePEc:rje:randje:v:23:y:1992:i:spring:p:106-122

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  1. Adriana Korczak & Piotr Korczak & Meziane Lasfer, 2009. "To Trade or Not to Trade: The Strategic Trading of Insiders around News Announcements," Bristol Economics Discussion Papers 09/613, Department of Economics, University of Bristol, UK. [Downloadable!]
  2. 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 Stephen M. Ross Business School. [Downloadable!]
  3. Giovanni Cespa, 2003. "A Comparison of Stock Market Mechanisms," CSEF Working Papers 94, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy. [Downloadable!]
    Other versions:
  4. Jie Hu & Thomas H. Noe, 1997. "The insider trading debate," Economic Review, Federal Reserve Bank of Atlanta, issue Q 4, pages 34-45. [Downloadable!]
  5. Juha-Pekka Kallunki & Henrik Nilsson & Janne Peltoniemi, 2009. "Regulated and unregulated insider trading around earnings announcements," European Journal of Law and Economics, Springer, vol. 27(3), pages 285-308, June. [Downloadable!] (restricted)
  6. Bernhardt, Dan & Hollifield, Burton & Hughson, Eric, 1993. "Investment and Insider Trading," Working Papers 830, California Institute of Technology, Division of the Humanities and Social Sciences. [Downloadable!]
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  7. Gabriella Chiesa & Giovanna Nicodano, 2003. "Privatization and Financial Market Development: Theoretical Issues," Working Papers 2003.1, Fondazione Eni Enrico Mattei. [Downloadable!]
  8. Thomas H. Noe, 1995. "Insider trading and the problem of corporate agency," Working Paper 95-2, Federal Reserve Bank of Atlanta. [Downloadable!]
    Other versions:
  9. Andrea Buffa & Giovanna Nicodano, 2006. "Should Insider Trading be Prohibited when Share Repurchases are Allowed?," Carlo Alberto Notebooks 16, Collegio Carlo Alberto. [Downloadable!]
    Other versions:
  10. Laura Beny, . "A Comparative Empirical Investigation of Agency and Market Theories of Insider Trading," University of Michigan John M. Olin Center for Law & Economics Working Paper Series umichlwps-1003, University of Michigan John M. Olin Center for Law & Economics. [Downloadable!]
  11. Chi-Wen Lee & Zemin Lu, 2008. "Trading on inside information when there may be tippees," Review of Quantitative Finance and Accounting, Springer, vol. 31(3), pages 241-260, October. [Downloadable!] (restricted)
  12. Chen, Zhaohui & Wilhelm Jr, William J, 2005. "The Industrial Organization of Financial Market Information Production," CEPR Discussion Papers 5314, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  13. Michael Firth & T. Y. Leung & Oliver M. Rui, 2009. "Insider Trading in Hong Kong: Tests of Stock Returns and Trading Frequency," Working Papers 042009, Hong Kong Institute for Monetary Research. [Downloadable!]
  14. Franklin Allen & Richard Herring, 2001. "Banking Regulation versus Securities Market Regulation," Center for Financial Institutions Working Papers 01-29, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
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