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Outsider Trading as an Incentive Device


Larry E. Ribstein (Deceased)


University of Illinois College of Law; PERC - Property and Environment Research Center

Bruce H. Kobayashi


George Mason University - School of Law


U Illinois Law & Economics Research Paper No. LE06-009
George Mason Law & Economics Research Paper No. 06-16
UC Davis Law Review, November 2006

Abstract:     
Outsiders often have and seek to trade on a firm's material, nonpublic information. For example, lawyers have traded on advance information about the filing of a lawsuit, a social activist has announced a plan to trade on advance information of a boycott, and a hedge fund operator has engaged in a controversial trading maneuver in a control contest. Trading on nonpublic information is generally permitted if the information was not misappropriated or accompanied by fraud, manipulation, or other misconduct. However, recent public focus on the above transactions signals possible regulation in certain outsider trading situations. More generally, Professors Ian Ayres and Stephen Choi propose giving firms broad rights to decide whether outsider trading in their stocks will be regulated. We argue against broad regulation on the basis that outsider trading can provide incentives for socially beneficial conduct. In particular, outsider trading provides an important way to capitalize on investments in information that are not otherwise protected by the intellectual property laws. Understanding these benefits is a crucial element in determining appropriate regulation limits.

Number of Pages in PDF File: 67

JEL Classification: G14, G18, G34, G38, K10, K21, K22, K41, L40

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Date posted: March 4, 2006  

Suggested Citation

Ribstein (Deceased), Larry E. and Kobayashi, Bruce H., Outsider Trading as an Incentive Device. U Illinois Law & Economics Research Paper No. LE06-009; George Mason Law & Economics Research Paper No. 06-16; UC Davis Law Review, November 2006. Available at SSRN: http://ssrn.com/abstract=888188

Contact Information

Larry Edward Ribstein (Deceased) (Contact Author)
University of Illinois College of Law ( email )
504 E. Pennsylvania Avenue
Champaign, IL 61820
United States
217-244-9881 (Phone)
217-244-1478 (Fax)
PERC - Property and Environment Research Center
2048 Analysis Drive
Suite A
Bozeman, MT 59718
United States

Bruce H. Kobayashi
George Mason University - School of Law ( email )
3301 Fairfax Drive
Arlington, VA 22201
United States
703-993-8034 (Phone)
703-993-8088 (Fax)
HOME PAGE: http://mason.gmu.edu/~bkobayas
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