Insider trading and the short-swing profit rule
Stephen L. Lenkey
Journal of Economic Theory, 2017, vol. 169, issue C, 517-545
The short-swing profit rule is a federal statute that requires insiders to forfeit any trading profit earned from a combined purchase and sale that occurs within a six-month period. Using a multi-period strategic rational expectations equilibrium framework, I demonstrate that the rule tends to reduce both the amount of insider trading and the amount of profit earned by an informed insider from information-based trades because the rule imposes a constraint on the insider's dynamic trading strategy. Nevertheless, the rule increases the insider's welfare at the expense of uninformed investors (outsiders) because the rule inhibits risk sharing, which leads to an ex ante wealth transfer from outsiders to the insider.
Keywords: Asymmetric information; Insider trading; Financial regulation (search for similar items in EconPapers)
JEL-codes: G14 G18 (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations Track citations by RSS feed
Downloads: (external link)
Full text for ScienceDirect subscribers only
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:169:y:2017:i:c:p:517-545
Access Statistics for this article
Journal of Economic Theory is currently edited by A. Lizzeri and K. Shell
More articles in Journal of Economic Theory from Elsevier
Series data maintained by Dana Niculescu ().