Regulating Insider Trading When Investment Matters
We provide a general framework for analyzing the effects of insider trading on real investment and welfare as well as the consequences of different regulatory policies in a model where all traders are rational expected-utility maximizers and aware of their position in the market. We find that: with costly information acquisition, an "abstain-or-disclose" rule tends to be optimal; with free information acquisition, laissez-faire is better. This suggests enforcing an abstain-or-disclose rule with a high standard of proof for inside information. Our approach also uncovers the pitfalls of welfare analysis in the noise-trader model.
Volume (Year): 8 (2004)
Issue (Month): 2 ()
|Contact details of provider:|| Web page: http://springerlink.metapress.com/link.asp?id=111870|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Diamond, Douglas W. & Verrecchia, Robert E., 1981. "Information aggregation in a noisy rational expectations economy," Journal of Financial Economics, Elsevier, vol. 9(3), pages 221-235, September.
- Rohit Rahi, 1996. "Adverse Selection and Security Design," Review of Economic Studies, Oxford University Press, vol. 63(2), pages 287-300.
- Hayne E. Leland., 1990.
"Insider Trading: Should It Be Prohibited?,"
Research Program in Finance Working Papers
RPF-195, University of California at Berkeley.
- Utpal Bhattacharya & Hazem Daouk, 2002. "The World Price of Insider Trading," Journal of Finance, American Finance Association, vol. 57(1), pages 75-108, 02.
- Holmstrom, Bengt & Tirole, Jean, 1993. "Market Liquidity and Performance Monitoring," Journal of Political Economy, University of Chicago Press, vol. 101(4), pages 678-709, August.
- Repullo, Rafael, 1999.
"Some Remarks on Leland's Model of Insider Trading,"
London School of Economics and Political Science, vol. 66(263), pages 359-74, August.
- Jean-Pierre Danthine & Serge Moresi, 1990.
"Volatility, Information and Noise Trading,"
CEPR Financial Markets Paper
0010, European Science Foundation Network in Financial Markets, c/o C.E.P.R, 77 Bastwick Street, London EC1V 3PZ..
- Jean-Pierre DANTHINE & Serge MORESI, 1990. "Volatility, Information, and Noise Trading," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 9015, Université de Lausanne, Faculté des HEC, DEEP.
- Michael Manove, 1989. "The Harm from Insider Trading and Informed Speculation," The Quarterly Journal of Economics, Oxford University Press, vol. 104(4), pages 823-845.
- Dan Bernhardt & Eric Hughson, 1991.
"Intraday Trade in Dealership Markets,"
841, Queen's University, Department of Economics.
- Diamond, Douglas W & Dybvig, Philip H, 1983.
"Bank Runs, Deposit Insurance, and Liquidity,"
Journal of Political Economy,
University of Chicago Press, vol. 91(3), pages 401-19, June.
- Ausubel, Lawrence M, 1990. "Insider Trading in a Rational Expectations Economy," American Economic Review, American Economic Association, vol. 80(5), pages 1022-41, December.
- Gabrielle Demange & Guy Laroque, 1993.
"Private Information and the Design of Securities,"
CEPR Financial Markets Paper
0036, European Science Foundation Network in Financial Markets, c/o C.E.P.R, 77 Bastwick Street, London EC1V 3PZ..
- Demsetz, Harold, 1986. "Corporate Control, Insider Trading, and Rates of Return," American Economic Review, American Economic Association, vol. 76(2), pages 313-16, May.
- Damodaran, Aswath & Liu, Crocker H, 1993. "Insider Trading as a Signal of Private Information," Review of Financial Studies, Society for Financial Studies, vol. 6(1), pages 79-119.
- Khanna, Naveen & Slezak, Steve L & Bradley, Michael, 1994. "Insider Trading, Outside Search, and Resource Allocation: Why Firms and Society May Disagree on Insider Trading Restrictions," Review of Financial Studies, Society for Financial Studies, vol. 7(3), pages 575-608.
- Bernhardt, Dan & Hollifield, Burton & Hughson, Eric, 1995.
"Investment and Insider Trading,"
Review of Financial Studies,
Society for Financial Studies, vol. 8(2), pages 501-43.
- Bray, Margaret, 1985. "Rational Expectations, Information and Asset Markets: An Introduction," Oxford Economic Papers, Oxford University Press, vol. 37(2), pages 161-95, June.
- Bhattacharya, Utpal & Spiegel, Matthew, 1991.
"Insiders, Outsiders, and Market Breakdowns,"
Review of Financial Studies,
Society for Financial Studies, vol. 4(2), pages 255-82.
- Spiegel, Matthew & Subrahmanyam, Avanidhar, 1992. "Informed Speculation and Hedging in a Noncompetitive Securities Market," Review of Financial Studies, Society for Financial Studies, vol. 5(2), pages 307-29.
- Sarkar Asani, 1994. "On the Equivalence of Noise Trader and Hedger Models in Market Microstructure," Journal of Financial Intermediation, Elsevier, vol. 3(2), pages 204-212, March.
- Albert S. Kyle, 1989. "Informed Speculation with Imperfect Competition," Review of Economic Studies, Oxford University Press, vol. 56(3), pages 317-355.
- Yosha Oved, 1995. "Information Disclosure Costs and the Choice of Financing Source," Journal of Financial Intermediation, Elsevier, vol. 4(1), pages 3-20, January.
When requesting a correction, please mention this item's handle: RePEc:kap:eurfin:v:8:y:2004:i:2:p:199-277. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sonal Shukla)or (Rebekah McClure)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.