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Insider Trading: Should It Be Prohibited?

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Author Info
Leland, Hayne E

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Abstract

Insider trading moves forward the resolution of uncertainty. Using a rational expectations model with endogenous investment level, the author shows that, when insider trading is permitted, (1) stock prices better reflect information and will be higher on average, (2) expected real investment will rise, (3) markets are less liquid, (4) owners of investment projects and insiders will benefit, and (5) outside investors and liquidity traders will hurt. Total welfare may increase or decrease depending on the economic environment. Factors that favor the prohibition of insider trading are identified. Copyright 1992 by University of Chicago Press.

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Publisher Info
Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 100 (1992)
Issue (Month): 4 (August)
Pages: 859-87
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Handle: RePEc:ucp:jpolec:v:100:y:1992:i:4:p:859-87

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