Should Insider Trading Be Prohibited When Share Repurchases are Allowed?
Andrea M. Buffa
University of Turin - Department of Economics and Statistics; Collegio Carlo Alberto
Review of Finance, Vol. 12, Issue 4, pp. 735-765, 2008
This paper considers share repurchases as the way long-term shareholders preserve their ability to use corporate information for speculative purposes when insider trading regulation is enforced. This use of corporate information increases the adverse selection losses of short-term shareholders. Thus, buy-back programs reduce their incentive to invest in stocks that back the most productive technology, leading to a socially inefficient equilibrium. It follows that insider trading should not be banned when share repurchases are allowed. More generally, the paper argues that the regulation of insider trading and repurchases can not be considered in isolation, and analyzes their interplay.
Keywords: G18, G14, D82, K22
Date posted: October 27, 2008