1932
0
  1. Home
  2. A-Z Publications
  3. Annual Review of Financial Economics
  4. Volume 6, 2014
  5. Article

Annual Review of Financial Economics

Volume 6, 2014

Insider Trading Controversies: A Literature Review*

Abstract

Using the artifice of a hypothetical trial, this article presents the cases for and against insider trading. Both sides in the trial produce as evidence the salient points made in more than 100 years of literature on insider trading. The initial days of the trial focus on the issues raised in the law literature such as fiduciary responsibility, the misappropriation theory, and the fairness and integrity of markets; however, the trial soon transfers focus to issues such as Pareto optimality, efficient contracting, market efficiency, and predictability raised in the financial economics literature. Open issues are then brought up. A jury finally hands down its verdict.

Keyword(s): cost of capital, efficient markets, enforcement, insider trading, liquidity, securities law
Loading

Article metrics loading...

/content/journals/10.1146/annurev-financial-110613-034422
2014-12-01
2024-05-03
Loading full text...

Full text loading...

/deliver/fulltext/financial/6/1/annurev-financial-110613-034422.html?itemId=/content/journals/10.1146/annurev-financial-110613-034422&mimeType=html&fmt=ahah

Literature Cited

  1. Acharya VV, Johnson TC. 2007. Insider trading in credit derivatives. J. Financ. Econ. 84:110–41 [Google Scholar]
  2. Acharya VV, Johnson TC. 2010. More insiders, more insider trading: evidence from private-equity buyouts. J. Financ. Econ. 98:500–23 [Google Scholar]
  3. Agrawal A, Cooper T. 2008. Insider trading before accounting scandals. Work. Pap., Univ. Ala. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=929413
  4. Agrawal A, Jaffe JF. 1995. Does Section 16b deter insider trading by target managers?. J. Financ. Econ. 39:295–319 [Google Scholar]
  5. Agrawal A, Nasser T. 2012. Insider trading in takeover targets. J. Corp. Finance 18:598–625 [Google Scholar]
  6. Akerlof GA. 1970. The market for ‘lemons’: quality uncertainty and the market mechanism. Q. J. Econ. 104:823–45 [Google Scholar]
  7. Ausubel LM. 1990. Insider trading in a rational expectations economy. Am. Econ. Rev. 80:1022–41 [Google Scholar]
  8. Bagehot W. 1971. The only game in town. Financ. Anal. J. 27:12–14 [Google Scholar]
  9. Bainbridge SM. 1998. Insider trading: an overview. Work. Pap., Univ. Calif., Los Angeles, Sch. Law. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=132529
  10. Bainbridge SM. 2001. The law and economics of insider trading: a comprehensive primer. Work. Pap., Univ. Calif., Los Angeles, Sch. Law. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=261277
  11. Bainbridge SM. 2013. An overview of insider trading law and policy: an introduction to the insider trading research handbook. Research Handbook on Insider Trading Bainbridge SM. 1–32 Northampton, MA: Edgar Elgar [Google Scholar]
  12. Banerjee A, Eckard EW. 2001. Why regulate insider trading? Evidence from the first great merger wave (1897-1903). Am. Econ. Rev. 91:1329–49 [Google Scholar]
  13. Bebchuk LA, Fershtman C. 1994. Insider trading and the managerial choice among risky projects. J. Financ. Quant. Anal. 29:1–14 [Google Scholar]
  14. Beny L. 2005. Do insider trading laws matter? Some preliminary comparative evidence. Am. Law Econ. Rev. 7:144–83 [Google Scholar]
  15. Beny L. 2008. Do investors in controlled firms value insider trading laws? International evidence. J. Law Econ. Policy 4:267–310 [Google Scholar]
  16. Beny L. 2013. The political economy of insider trading laws and enforcement: law vs. politics? International evidence. Research Handbook on Insider Trading Bainbridge S. 266–98 Northampton, MA: Edgar Elgar [Google Scholar]
  17. Berkman H, Koch PD, Westerholm PJ. 2014. Informed trading through the accounts of children. J. Finance 69:363–404 [Google Scholar]
  18. Bernardo AE. 2001. Contractual restrictions on insider trading: a welfare analysis. Econ. Theory 18:7–35 [Google Scholar]
  19. Bernhardt D, Hollifield B, Hughson E. 1995. Investment and insider trading. Rev. Financ. Stud. 8:501–43 [Google Scholar]
  20. Bettis JC, Coles J, Lemmon ML. 2000. Corporate policies restricting trading by insiders. J. Financ. Econ. 57:191–220 [Google Scholar]
  21. Bhattacharya S, Nicodano G. 2001. Insider trading, investment, and liquidity: a welfare analysis. J. Finance 56:1141–56 [Google Scholar]
  22. Bhattacharya U. 2006. Enforcement and its impact on cost of equity and liquidity of the market. Work. Pap., Indiana Univ. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=952698
  23. Bhattacharya U, Daouk H. 2009. When no law is better than a good law. Rev. Finance 13:577–627 [Google Scholar]
  24. Bhattacharya U, Daouk H. 2002. The world price of insider trading. J. Finance 57:75–108 [Google Scholar]
  25. Bhattacharya U, Daouk H, Jorgenson B, Kehr C-H. 2000. When an event is not an event: the curious case of an emerging market. J. Financ. Econ. 55:69–101 [Google Scholar]
  26. Bhattacharya U, Reny PJ, Spiegel MI. 1995. Destructive interference in an imperfectly competitive multi-security market. J. Econ. Theory 65:136–70 [Google Scholar]
  27. Bhattacharya U, Spiegel MI. 1991. Insiders, outsiders, and market breakdowns. Rev. Financ. Stud. 4:255–82 [Google Scholar]
  28. Bris A. 2005. Do insider trading laws work?. Eur. Financ. Manag. 11:267–312 [Google Scholar]
  29. Bushman RM, Piotroski JD, Smith AJ. 2005. Insider trading restrictions and analysts’ incentives to follow firms. J. Finance 60:35–66 [Google Scholar]
  30. Carlton DW, Fischel DR. 1983. The regulation of insider trading. Stanford Law Rev. 35:857–95 [Google Scholar]
  31. Cheng L, Firth M, Leung TY, Rui O. 2006. The effects of insider trading on liquidity. Pac. Basin Finance J. 14:467–83 [Google Scholar]
  32. Cheng Q, Lo K. 2006. Insider trading and voluntary disclosures. J. Account. Res. 44:815–48 [Google Scholar]
  33. Chiarella v. United States, 445 U.S. 222 (1980)
  34. Choy HL, Silvers RN. 2009. The effect of firm-imposed insider trading restrictions on cost of equity capital. Work. Pap., Drexel Univ. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1325387
  35. Cohen L, Frazzini A, Malloy C. 2010. Sell-side school ties. J. Finance 65:1409–37 [Google Scholar]
  36. Cohen L, Malloy C, Pomorski L. 2012. Decoding inside information. J. Finance 67:1009–43 [Google Scholar]
  37. Copeland T, Galai D. 1983. Information effects on the bid ask spread. J. Finance 38:1457–69 [Google Scholar]
  38. Cornell B, Sirri ER. 1992. The reaction of investors and stock prices to insider trading. J. Finance 47:1031–59 [Google Scholar]
  39. Cowen DJ. 2000. The First Bank of the United States and the securities market crash of 1992. J. Econ. Hist. 60:1041–60 [Google Scholar]
  40. Cziraki P, De Goeij P, Renneboog L. 2011. Corporate governance rules and insider trading profits. Work. Pap., Univ. Toronto http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1573643
  41. Dai L, Fu R, Kang J-K, Lee I. 2013. Internal corporate governance and insider trading. Work. Pap., Erasmus Univ. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2103523
  42. Damodaran A, Liu CH. 1993. Insider trading as a signal of private information. Rev. Financ. Stud. 6:79–119 [Google Scholar]
  43. Datta S, Iskandar-Datta ME. 1996. Does insider trading have information content for the bond market?. J. Bank. Finance 20:555–75 [Google Scholar]
  44. Dent GW Jr. 2013. Why legalized insider trading would be a disaster. Del. J. Corp. Law 38:247 [Google Scholar]
  45. Dirks v. SEC, 463 U.S. 646 (1983)
  46. Driscoll TE. 1956. Some aspects of corporate insider stock holdings and trading under Section 16b of Securities and Exchange Act of 1934. MBA Thesis, Univ. Penn
  47. Durnev AA, Nain AS. 2007. Does insider trading regulation deter private information trading? International evidence. Pac. Basin Finance J. 15:409–13 [Google Scholar]
  48. Easley D, Hvidkjaer S, O’Hara M. 2002. Is information risk a determinant of asset returns?. J. Finance 57:2185–221 [Google Scholar]
  49. Easley D, Kiefer NM, O’Hara M, Paperman JB. 1996. Liquidity, information, and infrequently traded stocks. J. Finance 51:1405–36 [Google Scholar]
  50. Easley D, O’Hara M. 2004. Information and the cost of capital. J. Finance 59:1553–83 [Google Scholar]
  51. Easley D, O’Hara M, Srinivas PS. 1998. Option volume and stock prices: evidence on where informed traders trade. J. Finance 53:431–65 [Google Scholar]
  52. Krugman P. 2003. The one-handed economist. Economist. Nov. 13. http://www.economist.com/node/2208841
  53. Elliott J, Morse D, Richardson G. 1984. The association between insider trading and information announcements. Rand J. Econ. 15:521–36 [Google Scholar]
  54. Ellul A, Panayides M. 2013. Do financial analysts restrain insiders’ informational advantage? Work. Pap., Indiana Univ. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1364660
  55. Fernandes N, Ferreira M. 2009. Insider trading laws and stock price informativeness. Rev. Financ. Stud. 22:1845–87 [Google Scholar]
  56. Finnerty JE. 1976. Insiders and market efficiency. J. Finance 31:1141–48 [Google Scholar]
  57. Fischer P. 1992. Optimal contracting and insider trading restrictions. J. Finance 47:673–94 [Google Scholar]
  58. Fishe RPH, Robe MA. 2004. The impact of illegal insider trading in dealer and specialist markets: evidence from a natural experiment. J. Financ. Econ. 71:461–88 [Google Scholar]
  59. Fishman MJ, Hagerty KM. 1992. Insider trading and the efficiency of stock prices. Rand J. Econ. 23:106–22 [Google Scholar]
  60. Fried JM. 1998. Reducing the profitability of corporate insider trading through pre-trading disclosure. South. Calif. Law Rev. 71:303–92 [Google Scholar]
  61. Garfinkel JA. 1997. New evidence on the effects of federal regulations on insider trading: the Insider Trading and Securities Fraud Enforcement Act (ITSFEA). J. Corp. Finance 3:89–111 [Google Scholar]
  62. Givoli D, Palmon D. 1985. Insider trading and the exploitation of inside information: some empirical evidence. J. Bus. 58:69–87 [Google Scholar]
  63. Glass G. 1966. Extensive insider accumulation as an indicator of near term stock price performance. PhD Thesis, Ohio State Univ
  64. Glosten LR, Milgrom PR. 1985. Bid, ask and transaction prices in a specialist market with heterogeneously informed traders. J. Financ. Econ. 14:71–100 [Google Scholar]
  65. Gosnell T, Keown AJ, Pinkerton J. 1992. Bankruptcy and insider trading: difference between exchange-listed and OTC firms. J. Finance 47:349–62 [Google Scholar]
  66. Griffin PA, Lont DH, McClune K. 2012. Insightful insiders? Insider trading and stock return around debt covenant violation disclosures. Work. Pap., Univ. Calif., Davis http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1685973
  67. Grossman SJ, Stiglitz SE. 1980. On the impossibility of informationally efficient markets. Am. Econ. Rev. 70:393–408 [Google Scholar]
  68. Guercio DD, Odders-White ER, Ready MJ. 2013. The deterrence effect of SEC enforcement intensity on illegal insider trading. Work. Pap., Univ. Wis. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1784528
  69. Heinkel R, Kraus A. 1987. The effect of insider trading on average rates of return. Can. J. Econ. 20:588–611 [Google Scholar]
  70. Huddart S, Hughes JS, Levine CB. 2001. Public disclosure and dissimulation of insider trades. Econometrica 69:665–81 [Google Scholar]
  71. Jackson HE, Roe MJ. 2009. Public and private enforcement of securities laws: resource-based evidence. J. Financ. Econ. 93:207–38 [Google Scholar]
  72. Jaffe JF. 1974a. The effect of regulation changes on insider trading. Bell J. Econ. Manag. Sci. 5:93–121 [Google Scholar]
  73. Jaffe JF. 1974b. Special information and insider trading. J. Bus. 3:410–26 [Google Scholar]
  74. Jarrell GA, Poulsen AB. 1989. Stock trading before the announcement of tender offers: insider trading or market anticipation?. J. Law Econ. Organ. 5:225–48 [Google Scholar]
  75. Jeng LA, Metrick A, Zeckhauser R. 2003. Estimating the returns to insider trading: a performance-evaluation perspective. Rev. Econ. Stat. 85:453–71 [Google Scholar]
  76. Keown AJ, Pinkerton JM. 1981. Merger announcements and insider trading activity: an empirical investigation. J. Finance 36:855–69 [Google Scholar]
  77. Khanna N, Slezak SL, Bradley M. 1994. Insider trading, outside search, and resource allocation: why firms and society may disagree on insider trading restrictions. Rev. Financ. Stud. 7:575–608 [Google Scholar]
  78. King M, Roell A, Kay J, Wyplosz C. 1988. Insider trading. Econ. Polit. 3:163–93 [Google Scholar]
  79. Koudijs P. 2013. ‘Those who know most’: insider trading in 18thcentury Amsterdam. Work. Pap., Stanford Univ. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2226816
  80. Kyle AS. 1985. Continuous auctions and insider trading. Econometrica 53:1315–36 [Google Scholar]
  81. Laffont JJ, Maskin ES. 1990. The efficient market hypothesis and insider trading in the stock market. J. Polit. Econ. 98:70–93 [Google Scholar]
  82. Lakonishok J, Lee I. 2001. Are insider trades informative?. Rev. Financ. Stud. 14:79–111 [Google Scholar]
  83. La Porta R, Lopez-de-Silanes F, Shleifer A, Vishny RW. 1998. Law and finance. J. Polit. Econ. 106:1113–55 [Google Scholar]
  84. Leland H. 1992. Insider trading: Should it be prohibited?. J. Polit. Econ. 100:859–87 [Google Scholar]
  85. Li OZ, Zhang Y. 2006. Financial restatement announcements and insider trading. Work. Pap., Natl. Univ. Singap. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=929539
  86. Lin J-C, Howe JS. 1990. Insider trading in the OTC market. J. Finance 45:1273–84 [Google Scholar]
  87. Lorie JH, Neiderhoffer V. 1968. Predictive and statistical properties of insider trading. J. Law Econ. 11:35–53 [Google Scholar]
  88. Manne HG. 1966. Insider Trading and the Stock Market. New York: Free Press
  89. Manne HG. 1967. What’s so bad about insider trading?. Challenge (White Plains) 15:14–16 [Google Scholar]
  90. Manne HG. 2005. Insider trading, virtual markets, and the dog that did not bark. J. Corp. Law 31:167–85 [Google Scholar]
  91. Manove M. 1989. The harm from insider trading. Q. J. Econ. 104:823–45 [Google Scholar]
  92. Marin JM, Olivier JP. 2008. The dog that did not bark: insider trading and crashes. J. Finance 63:2429–76 [Google Scholar]
  93. Masson RT, Madhavan A. 1991. Insider trading and the value of the firm. J. Financ. Quant. Anal. 39:333–53 [Google Scholar]
  94. Maug E. 2002. Insider trading legislation and corporate governance. Eur. Econ. Rev. 46:1569–97 [Google Scholar]
  95. McConnell JJ, Servaes H, Lins KV. 2008. Changes in insider ownership and changes in the market value of the firm. J. Corp. Finance 14:92–106 [Google Scholar]
  96. McCord JWH, McCord SL, Bailey CS. 2012. Criminal law and Procedure for the Paralegal: A Systems Approach. Clifton Park, NY: Delmar. 4th ed
  97. Meulbroek LK. 1992. An analysis of illegal insider trading. J. Finance 47:1661–99 [Google Scholar]
  98. Milgrom PR, Stokey N. 1982. Information, trade and common knowledge. J. Econ. Theory 26:17–27 [Google Scholar]
  99. Noe T. 1997. Insider trading and the problem of corporate agency. J. Law Econ. Organ. 13:287–318 [Google Scholar]
  100. Oliver v. Oliver, 521 U.S. 642 (1903)
  101. Penman SH. 1982. Insider trading and the dissemination of firms’ forecast information. J. Bus. 55:479–503 [Google Scholar]
  102. Ravina E, Sapienza P. 2010. What do independent directors know? Evidence from their trading. Rev. Financ. Stud. 23:962–1003 [Google Scholar]
  103. Rogoff DL. 1964. The forecasting properties of insider transactions. DBA Thesis, Michigan State Univ
  104. Roulstone DT. 2003. The relationship between insider-trading restrictions and executive compensation. J. Account. Res. 41:525–51 [Google Scholar]
  105. Rozeff MS, Zaman MA. 1988. Market efficiency and insider trading: New evidence. J. Bus. 61:25–44 [Google Scholar]
  106. Ryan SG, Tucker JW, Zhou Y. 2013. Securitization and insider trading. Work. Pap., NYU. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2262446
  107. SEC v. Cady, Roberts and Company, 40 S.E.C. 907 (1961)
  108. SEC v. Texas Gulf Sulphur Co., 401 F.2d 833 (1968)
  109. Seyhun HN. 1986. Insiders’ profits, costs of trading, and market efficiency. J. Financ. Econ. 16:189–212 [Google Scholar]
  110. Seyhun HN. 1988. The information content of aggregate insider trading. J. Bus. 61:1–24 [Google Scholar]
  111. Seyhun HN. 1992a. The effectiveness of insider trading sanctions. J. Law Econ. 35:149–82 [Google Scholar]
  112. Seyhun HN. 1992b. Why does aggregate insider trading predict future stock returns?. Q. J. Econ. 107:1303–31 [Google Scholar]
  113. Seyhun HN, Bradley B. 1997. Corporate bankruptcy and insider trading. J. Bus. 70:189–216 [Google Scholar]
  114. Skaife HA, Veenman D, Wangerin D. 2013. Internal control over financial reporting and managerial rent extraction: evidence from the profitability of insider trading. J. Account. Econ. 55:91–110 [Google Scholar]
  115. Strong v. Repide, 213 U.S. 419 (1909)
  116. Summers SL, Sweeney JT. 1998. Fraudulently misstated financial statements and insider trading: an empirical analysis. Account. Rev. 73:131–46 [Google Scholar]
  117. Tavakoli M, McMillan D, McKnight PJ. 2012. Insider trading and stock prices. Int. Rev. Econ. Finance 22:254–66 [Google Scholar]
  118. Thevenot M. 2012. The factors affecting illegal insider trading in firms with violations of GAAP. J. Account. Econ. 51:375–90 [Google Scholar]
  119. Tighe C, Michener R. 1994. The political economy of insider-trading laws. Am. Econ. Rev. 84:164–68 [Google Scholar]
  120. United States v. O’Hagan, 521 U.S. 642 (1997)
  121. Wang W, Steinberg MI. 2010. Insider Trading New York: Oxford Univ. Press
  122. Wu HK. 1963. Corporate insider trading profitability and stock price movement. PhD Diss., Univ. Penn
  123. Xu J. 2008. New evidence on the effects of the Insider Trading Sanctions Act of 1984. Work. Pap., Purdue Univ. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1100641
  124. Ziobrowski AJ, Cheng P, Boyd JW, Ziobrowski BJ. 2004. Abnormal returns from the common stock investments of the U.S. Senate. J. Financ. Quant. Anal. 39:661–76 [Google Scholar]
/content/journals/10.1146/annurev-financial-110613-034422
Loading
  • Article Type: Review Article

Most Cited Most Cited RSS feed

This is a required field
Please enter a valid email address
Approval was a Success
Invalid data
An Error Occurred
Approval was partially successful, following selected items could not be processed due to error