Insider Trading Laws Research Articles

The Law and Economics of Insider Trading: A Comprehensive Primer

Insider trading likely is one of the most common forms of securities fraud, yet it remains one of the most controversial aspects of securities regulation among legal (and economic) scholars. This paper provides a comprehensive overview of both the law of insider trading and the contested economic analysis thereof. The paper adopts a historical approach to the doctrinal aspects of insider trading, beginning with turn of the 20th Century state common law, and tracing the prohibition's evolution up to the most recent U.S. Supreme Court decisions under Rule 10b-5. The paper then reviews the debate between those scholars favoring deregulation of insider trading, allowing corporations to set their own insider trading policies by contract, and those who contends that the property right to inside information should be assigned to the corporation without the right of contractual reassignment. The paper also reviews the public choice analysis of insider trading to show that the prohibition benefits market professionals and corporate managers rather than investors.

Do Insider Trading Laws Work?

By calculating an estimated measure of undetected insider trading, this paper shows that profits made by informed corporate insiders prior to tender offer announcements increase after the first enforcement of insider trading laws. I analyze the effects of Insider Trading regulation on a sample of 5,099 acquisitions in 56 different countries, and estimate the profits due to insider trading from the abnormal volume in the weeks prior to the announcement, under the assumption that insiders purchase those shares at the prevailing price and hold them until the public announcement. I find that laws that prosecute insider trading fail to eliminate profits made by insiders, and make acquisitions more expensive. Therefore, by increasing the market reaction to an acquisition, insider trading laws make it profitable to violate them.

Constraints on Shareholder Activism in the United States and Slovenia

Prepared for a conference and text on Slovenian corporate governance, this article examines the corporate governance role of the large institutional investors that dominate the stockownership of privatized Slovenian corporations. In contrast to the U.S. model in which ownership and control is separated, stockownership is widely dispersed, and shareholder power is diffuse, as famously described by Berle and Means, the privatization process resulted in highly concentrated ownership of Slovenian corporations. The question presented here is whether such concentration is desirable. The article acknowledges that shareholder activism on the part of large institutional investors offers some economic benefits by potentially constraining agency costs, but contends that those benefits come at too high a cost. Two lines of argument are pursued. First, there is a substantial risk that large shareholders will use their control to self-deal or otherwise disadvantage minority shareholders. Experience teaches that the risk of self-dealing is especially significant in transition economies, such as Slovenia. Second, the U.S. model of separated ownership and control, dispersed stockownership, and diffuse shareholder control offers significant efficiency advantages. Neither shareholders nor any other constituency have the information or the incentives necessary to make sound decisions on either operational or policy questions. Overcoming the collective action problems that prevent meaningful shareholder involvement would be difficult and costly. Accordingly, shareholders will prefer to irrevocably delegate decisionmaking authority to some smaller group; namely, the board of directors. Given the significant virtues of discretion, preservation of managerial discretion should always be the null hypothesis. The separation of ownership and control mandated by U.S. corporate law has precisely that effect. The further constraints on shareholder activism provided by U.S. securities law, accordingly, likely have a strong efficiency justification. The article then provides a doctrinal overview of those constraints. Four specific aspects of U.S. securities law are examined: (1) disclosure requirements pertaining to large holders; (2) shareholder voting and communication rules; (3) insider trading laws; and (4) short swing profits rules. The article concludes by summarizing the comparable provisions of Slovenian law, noting that Slovenian law in many respects parallels the U.S. model. Unfortunately, continued state ownership and the political influence of large holders cast doubt on whether Slovenia will muster the will to meaningfully constrain the power of its institutional investors.

Pre-announcement of Insiders' Trades

Among the reactions to recent corporate scandals are calls for greater transparency of insiders' trades. The Securities and Exchange Commission's recent rule on fair disclosure is accompanied by a safe harbor from prosecution under insider trading laws for insiders who pre-commit to trades. A blue-ribbon commission convened to address recent financial scandals and subsequent decline in investor confidence recommended that insiders be required to preannounce sales of stock in their companies. The commission's call for insiders to preannounce their sales echoes proposals made over a decade ago in the legal press, law reviews, and the U.S. Congress that would require pre-announcement of all trades. We consider the effects of insiders pre-announcing their trades on their preferences for public disclosure that would pre-empt their private information when other motives for insiders to trade are present. Two principal forces emerge. With pre-announcement, insiders cannot expect to profit on their private information, but cannot ignore the incentive to do so when market makers are unable to disentangle insiders' motives. Pre-emptive public disclosure allows insiders to avoid the dysfunctional consequences of this incentive. However, such disclosure before insiders have an opportunity to trade exposes them to greater price risk than would otherwise be the case. Our analysis demonstrates these effects.

The World Price of Insider Trading

The existence and the enforcement of insider trading laws in stock markets is a phenomenon of the 1990s. A study of the 103 countries that have stock markets reveals that insider trading laws exist in 87 of them, but enforcement - as evidenced by prosecutions - has taken place in only 38 of them. Before 1990, the respective numbers were 34 and 9. Does this matter? We find that the cost of equity in a country, after controlling for a number of other variables, does not change after the introduction of insider trading laws, but decreases significantly after the first prosecution.

Insider Trading Laws and the Role of Securities Analysts

To maintain a fair and open market, the use of nonpublic material information is generally prohibited by law or regulation. Financial analysts, whose profession depends upon gathering and processing information about companies, need to scrupulously avoid receiving, communicating, and trading on “insider” information.

Does Section 16b deter insider trading by target managers?

This paper examines empirically whether the short-swing rule (Section 16b of the Securities Exchange Act) deters managers from trading before mergers. Since a merger forces the sale of the target's outstanding equity, insider purchases within six months before the merger cannot escape this rule. We examine the 1941–1961 period when no other insider trading laws were enforced. Consistent with 16b's deterrent effect, managers' purchases drop significantly before the announcement. Before completion, the decrease occurs only in the 1941–1955 period. Surprisingly, pre-announcement sales do not decline, even though 16b cannot punish deferral of planned sales.

Insider Trading and the Social Contract

Abstract:The law of insider trading has progressed from an expansive approach, according to which all trading on nonpublic information was considered illegal, to a constricted approach, under which corporate outsiders are permitted to trade on nonpublic information provided such trading does not breach a fiduciary duty. This article analyzes both the former, expansive theory and the currently utilized constricted theory, within a framework of basic tenets of the American capitalist social contract regarding legitimacy of property claims. The existing constricted approach to the regulation of insider trading is found to be deficient in meeting the expectations of two core components of the social contract: it discourages procedural equality of opportunity, and it endorses claims to property that are not characterized by legitimate methods of acquisition or transfer. Because the old, expansive regulatory interpretation was more consistent with the terms of the social contract in regard to property claims, it served our economic and ethical expectations more effectively than the system presently in place. Accordingly, the article culminates in a recommendation that the expansive approach to regulating insider trading be reestablished under Unites States law.

A Theory of Law and Information: Copyright, Spleens, Blackmail, and Insider Trading

Structuralist and determinist accounts of social forces generally argue that one area of social life—the means and relations of production, the mediation of the fundamental tension between self and others, or the patterns of childrearing—is the real determinant of history. The "marketplace of ideas" is more than just a random metaphor: it is an accurate summation of many of the assumptions that our society brings to the discussion of information issues. As currently constructed however, intellectual property in particular and information issues in general seem to be in the thrall of an idea that is taken as truth where it should be questioned as dogma. Economists analyze some information from the “commodity” side and other information from the “perfect information” side, but they can neither produce a theoretical metaprinciple. Professor Levmore’s article on insider trading and contract law styles as “contemptible” the farmer who “to preserve a fraud claim, asks specific questions about activities he would otherwise never engage in”.

The Effectiveness of the Insider-Trading Sanctions

T HIS study empirically examines the effects of increases in the level and enforcement of insider-trading regulations in the 1980s on corporate insiders.1 The main goal of the insider-trading regulations is to prevent insiders from trading on the basis of material, nonpublic corporate information. In addition, regulations require that insiders report their transactions to the Securities and Exchange Commission (SEC) and refrain from generating short-term profits by trading in their own firms' stocks. Regulations also prohibit insiders from short selling the securities of their firms.

Investment Analysts and the Law of Insider Trading

Investment Analysts and the Law of Insider Trading

INSIDER TRADING: THE LAW, THE THEORY, THE EVIDENCE

This paper reviews the arguments concerning the role and effects of insider trading. In reviewing the law of insider trading, we concentrate on the main elements of the regulatory framework and court interpretations. We discuss economic issues involved in the debate over the benefits and costs of insider trading. Finally, we discuss evidence illustrating that legal market research can explain much of the runup in a target firm's stock price before a tender offer is formally announced.

The Economic Effects of Federal Regulation of the Market for New Security Issues

The Economic Effects of Federal Regulation of the Market for New Security Issues