Insider Trading: Should It Be Prohibited?
AbstractInsider 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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Bibliographic InfoPaper provided by University of California at Berkeley in its series Research Program in Finance Working Papers with number RPF-195.
Date of creation: 01 Mar 1990
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