Regulating Insider Trading when Investment Matters

Xavier Vives and Luis Medrano

No 3292, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We analyse the effects of insider trading on real investment and welfare, and the consequences of different regulatory policies: a disclose-or-abstain rule, ?fair? disclosure, laissez-faire and forbidding insider trades based on ?precise? information. We perform the analysis in a model in which all traders are rational expected-utility maximizers and aware of their position in the market. We compare the equilibrium with insider trading with the equilibrium in the same market without insider trading in two scenarios: costly and costless information acquisition. We find that with costly information acquisition an abstain-or-disclose rule tends to be optimal while 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. This rule of thumb advocates a laissez policy both for selective disclosure and in high-tech industries. Our approach uncovers the pitfalls of welfare analysis in the noise trader model.

Keywords: Insider trading selective disclosure; Disclose-or-abstain rule; Real investment; Welfare; Hedging; Speculation; Noise traders (search for similar items in EconPapers)
JEL-codes: D82 G12 G14 (search for similar items in EconPapers)
Date: 2002-04
New Economics Papers: this item is included in nep-cfn and nep-fmk
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Journal Article: Regulating Insider Trading When Investment Matters (2004)
Journal Article: Regulating Insider Trading When Investment Matters (2004)
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