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Should Insider Trading be Prohibited when Share Repurchases are Allowed?

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  • Andrea Buffa
  • Giovanna Nicodano

Abstract

This paper considers share repurchases as the way long-term shareholders preserve their ability to use corporate information for speculative purposes when insider trading regulation is enforced. This use of corporate information increases the adverse selection losses of short-term shareholders. Thus, buy-back programs reduce their incentive to invest in stocks that back the most productive technology, leading to a socially inefficient equilibrium. It follows that insider trading should not be banned when share repurchases are allowed.

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Bibliographic Info

Paper provided by Collegio Carlo Alberto in its series Carlo Alberto Notebooks with number 16.

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Length: 29 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:cca:wpaper:16

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Keywords: insider trading; share repurchase; liquidity; securities regulation; corporate information;

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Cited by:
  1. Antonio Romero Medina & Mateo Triossi, 2007. "Games of capacities : a (close) look to Nash Equilibria," Economics Working Papers we075933, Universidad Carlos III, Departamento de Economía.
  2. Fabio C. Bagliano & Carlo A. Favero & Giovanna Nicodano, 2011. "Insider Trading, Traded Volume and Returns," Working papers 26, Former Department of Economics and Public Finance "G. Prato", University of Torino.

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