Insider Trading via the Corporation
Jesse M. Fried
Harvard Law School; European Corporate Governance Institute (ECGI)
February 26, 2014
University of Pennsylvania Law Review, 2014 Forthcoming
Harvard Law School, Harvard Law School, Public Law & Legal Theory, Research Paper Series
A U.S. firm buying and selling its own shares in the open market can trade on inside information more easily than its own insiders because it is subject to less stringent trade- disclosure rules. Not surprisingly, insiders exploit these relatively lax rules to engage in indirect insider trading: they have the firm buy and sell shares at favorable prices to boost the value of their own equity. Such indirect insider trading imposes substantial costs on public investors in two ways: by systematically diverting value to insiders and by inducing insiders to take steps that destroy economic value. To reduce these costs, I put forward a simple proposal: subject firms to the same trade-disclosure rules that are imposed on their insiders.
Number of Pages in PDF File: 39
Keywords: insider trading, corporate governance, stock buybacks, share repurchases, open market repurchases, equity issuances, at-the-market offerings, overvalued equity, payout policy, seasoned equity offerings, manipulation, real earnings management
JEL Classification: G18, G32, G34, G35, G38, K22Accepted Paper Series
Date posted: August 2, 2012 ; Last revised: February 26, 2014
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