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When chasing the offender hurts the victim: Collateral damage from insider legislation

Listed author(s):
  • Stefan Palan

    ()

    (Institute of Banking and Finance, Karl-Franzens-University Graz
    Department of Banking and Finance, Leopold-Franzens-University Innsbruck)

  • Thomas Stöckl

    ()

    (Department of Banking and Finance, Leopold-Franzens-University Innsbruck)

Backers and opponents argue over the pros and cons of legislation forbidding insider trading. At the same time, the lack of reliable empirical data caused by the currently prevailing legal systems inhibits an exhaustive scientific evaluation. We circumvent this problem by resorting to laboratory market data and show that insider legislation has significant negative effects on multiple market dimensions: Under insider legislation, (i) the liquidity and informational efficiency of markets are reduced, while spreads are unaffected, (ii) uninformed traders' losses (before redistribution) are higher due to deteriorating market quality, and (iii) overall welfare suffers due to the lower information content of prices and the cost of enforcement. In summary, insider legislation leads to welfare losses while failing to deliver the expected benefits for uninformed investors.

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Paper provided by Faculty of Social and Economic Sciences, Karl-Franzens-University Graz in its series Working Paper Series, Social and Economic Sciences with number 2014-03.

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Length: 59 pages
Date of creation: 16 Sep 2014
Handle: RePEc:grz:wpsses:2014-03
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