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Should Insider Trading be Prohibited when Share Repurchases are Allowed?

Author Info

Listed author(s):
  • 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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File URL: http://www.carloalberto.org/assets/working-papers/no.16.pdf
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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
Handle: RePEc:cca:wpaper:16
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Keywords: insider trading; share repurchase; liquidity; securities regulation; corporate information;

Other versions of this item:

Find related papers by JEL classification:
  • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
  • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
  • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
  • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law

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Cited by:

  1. 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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