Working Paper: CEPR ID: DP16179
Authors: Antonio Mele; Francesco Sangiorgi
Abstract: 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.
Keywords: Insider Trading; Post-trade Transparency; Ex Ante Corporate Disclosure; Information Crowding-out
JEL Codes: D82; G14; G18
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Regulating insider trading (G18) | Improved market efficiency (G14) |
| Regulating insider trading (G18) | Improved market liquidity (G19) |
| Banning insider trading (G18) | Enhanced market efficiency (G14) |
| Mandatory disclosure (G38) | Better price discovery (D49) |
| Banning insider trading (G18) | Most liquid markets (G15) |
| Insider trading (G14) | Information crowding-out (E62) |
| Information crowding-out (E62) | Discouragement of outside investors from acquiring information (D82) |