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Insider Trading and the Efficiency of Stock Prices

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  • Michael J. Fishman
  • Kathleen M. Hagerty
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    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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    Bibliographic 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

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    Handle: RePEc:rje:randje:v:23:y:1992:i:spring:p:106-122

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    Web page: http://www.rje.org

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    Cited by:
    1. Thomas H. Noe, 1995. "Insider trading and the problem of corporate agency," Working Paper 95-2, Federal Reserve Bank of Atlanta.
    2. Jie Hu & Thomas H. Noe, 1997. "The insider trading debate," Economic Review, Federal Reserve Bank of Atlanta, issue Q 4, pages 34-45.
    3. McDonald, Robert L., 2013. "Contingent capital with a dual price trigger," Journal of Financial Stability, Elsevier, vol. 9(2), pages 230-241.
    4. : Jana P. Fidrmuc & Adriana Korczak & Piotr Korczak, 2012. "Why does Shareholder Protection Matter for Abnormal Returns after Reported Insider Purcases and Sales?," Working Papers wpn12-03, Warwick Business School, Finance Group.
    5. Itay Goldstein & Emre Ozdenoren & Kathy Yuan, 2011. "Trading Frenzies and their Impact on Real Investment," FMG Discussion Papers dp670, Financial Markets Group.
    6. Lightfoot, Geoffrey & Wisniewski, Tomasz, 2014. "Information Asymmetry and Power in a Surveillance Society," MPRA Paper 53109, University Library of Munich, Germany.
    7. 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.
    8. Jennie Bai & Thomas Philippon & Alexi Savov, 2013. "Have Financial Markets Become More Informative?," NBER Working Papers 19728, National Bureau of Economic Research, Inc.
    9. Wielhouwer, Jacco L., 2013. "When is public enforcement of insider trading regulations effective?," International Review of Law and Economics, Elsevier, vol. 34(C), pages 52-60.
    10. Tong, Wilson H.S. & Zhang, Shaojun & Zhu, Yanjian, 2013. "Trading on inside information: Evidence from the share-structure reform in China," Journal of Banking & Finance, Elsevier, vol. 37(5), pages 1422-1436.
    11. Estrada, Javier, 1995. "Insider trading: Regulation, securities markets, and welfare under risk aversion," The Quarterly Review of Economics and Finance, Elsevier, vol. 35(4), pages 421-449.
    12. Gabriella Chiesa & Giovanna Nicodano, 2003. "Privatization and Financial Market Development: Theoretical Issues," Working Papers 2003.1, Fondazione Eni Enrico Mattei.
    13. Keser, Claudia & Markst├Ądter, Andreas, 2014. "Informational asymmetries in laboratory asset markets with state-dependent fundamentals," Center for European, Governance and Economic Development Research Discussion Papers 207, University of Goettingen, Department of Economics.

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