Overvalued Equity and the Case for an Asymmetric Insider Trading Regime
Thomas A. Lambert
University of Missouri - School of Law
March 10, 2006
U of Missouri-Columbia School of Law Legal Studies Research Paper No. 2006-09
The forty-year debate over whether insider trading should be regulated has generally proceeded in all-or-nothing terms: Either all insider trading should be permitted (subject only to private restrictions imposed by issuers themselves), or none should. This Article argues for an asymmetric insider trading policy under which insider trading that decreases the price of an overvalued stock is generally permitted, but insider trading that increases the price of an undervalued stock is generally prohibited. Concluding that the net investor benefits of price-decreasing insider trading exceed those of price-enhancing insider trading, the Article argues that an asymmetric insider trading regime likely represents the bargain that shareholders and corporate managers would strike if they were legally and practically able to negotiate an insider trading policy. Current insider trading doctrine would permit regulators to impose such an asymmetric insider trading policy as the default rule.
Number of Pages in PDF File: 90
Keywords: insider trading, stock mispricing, overvalued equity, overvaluation, securities law, behavioral finance, stock markets, agency costs
JEL Classification: G18, G38, K22working papers series
Date posted: March 13, 2006
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