DP16179 Insider Trading Regulation and Market Quality Tradeoffs
|Author(s):||Antonio Mele, Francesco Sangiorgi|
|Publication Date:||May 2021|
|Keyword(s):||ex ante corporate disclosure, information crowding-out, insider trading, post-trade transparency|
|JEL(s):||D82, G14, G18|
|Programme Areas:||Financial Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=16179|
Insider trading should not be left unregulated: it should be either subject to mandatory disclosure or banned altogether. As the costs to collect and process information drop, investors render markets increasingly efficient. Insider trading would hinder this process by discouraging such activities: prohibiting it would avoid information crowding-out and make markets more efficient. When information costs are large, or uncertainty is small, such that information activities are limited to start with, these effects are small and regulating insider trading through mandatory disclosure leads to the informationally most efficient market. In times of elevated uncertainty, post-trade regulation of insider trading also acts as policy complement to ex ante corporate disclosure for the purpose of increasing market efficiency. Finally, markets are always the most liquid with a complete ban on insider trading.