Arbitrage, Information Theft, and the Mistaken Attack On Insider Trading
Michael C. Jensen
Harvard Business School; Social Science Electronic Publishing (SSEP), Inc.; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)
ARBITRAGE, INFORMATION THEFT, AND THE MISTAKEN ATTACK ON INSIDER TRADING, Chief Financial Officer U.S.A., John Thackray, ed., pp. 114-115, Sterling Publications, London: 1988
Reprinted as ARBITRAGE, INFORMATION THEFT, AND INSIDER TRADING,' in New Palgrave Dictionary of Money and Finance, London, 1992
Arbitragers provide important productive services to investors, and the supply of these services is threatened by the outpouring of self-righteous protests and legal actions in the wake of the SEC prosecution of insider trading cases. Current law, as interpreted by the SEC, fails to recognize that target shareholder interests are served by a legal rule that allows the producer of privately created information to share that information with others, including arbitragers. There is no economic basis for barring trading on this information so long as the information is legally obtained.
When takeover bids occur, arbitragers provide valuable services for target-firm investors who do not have the time, ability or inclination to gather information on takeover bids for companies in which they hold stock. They help direct resources to their highest valued use. In doing so, the arbitragers provide three critically important services: they help value alternative offers, including the plans of target management; provide riskbearing services for investors who do not wish to bear the great uncertainty that occurs between the announcement and final outcome of a takeover bid or restructuring; and. help resolve the collective action or free rider problems of small diffuse shareholders who cannot organize to negotiate directly with competing bidders for the target firm. The arbitragers do this by aggregating large blocks of shares for tender to the highest bidder- sometimes even negotiating the offer price directly with the bidder.
Number of Pages in PDF File: 7
Keywords: Distinguishing between theft and sharing the results of private researchAccepted Paper Series
Date posted: September 19, 2003
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