ABSTRACT
Proponents of the deregulation of insider trading discount these arguments and assert that insider trading can be benecial on the whole and ought to be limited, if at all, only by corporations themselves via contract. With respect to the fairness argument, deregulation proponents retort that insider trading cannot be “unfair” to investors if they know in advance that it might occur and nonetheless choose to engage in the purportedly unfair trades (Scott 1980, 807-9). Moreover, deregulation proponents assert, the purported eciency losses occasioned by insider trading are overblown (Carlton and Fischel 1983). ere is little evidence, they say, that insider trading reduces liquidity by discouraging individuals from investing in the stock market, and it might actually increase such liquidity by providing benets to investors in equities. With respect to the claim that insider trading creates incentives for delayed disclosures and value-reducing management, advocates of deregulation claim that such
mismanagement is unlikely for several reasons. First, managers face reputational constraints that will discourage such misbehavior. In addition, managers, who generally work in teams, cannot engage in value-destroying mismanagement without persuading their colleagues to go along with the strategy, and any particular employee’s ability to engage in mismanagement will therefore be constrained by his or her colleagues’ attempts to maximize rm value or to gain personally by exposing proposed mismanagement. With respect to the argument that insider trading raises the cost of trading securities by increasing the bid-ask spread, proponents of deregulation point to empirical evidence discounting that purported eect (Dolgopolov 2004). Finally, deregulation proponents assert that any “property right” to material nonpublic information need not be a nontransferable interest granted to the corporation; eciency considerations may call for the right to be transferable and/or initially allocated to a different party (e.g., to insiders) (Macey 1984).
