Should Insider Trading Be Prohibited When Share Repurchases are Allowed?

Posted: 27 Oct 2008

See all articles by Andrea M Buffa

Andrea M Buffa

University of Colorado at Boulder - Leeds School of Business

Giovanna Nicodano

University of Turin - Department ESOMAS; Collegio Carlo Alberto; EGCI; Netspar

Multiple version iconThere are 2 versions of this paper

Date Written: 2008

Abstract

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

Suggested Citation

Buffa, Andrea M and Nicodano, Giovanna, Should Insider Trading Be Prohibited When Share Repurchases are Allowed? (2008). Review of Finance, Vol. 12, Issue 4, pp. 735-765, 2008, Available at SSRN: https://ssrn.com/abstract=1289176 or http://dx.doi.org/rfn009

Andrea M Buffa (Contact Author)

University of Colorado at Boulder - Leeds School of Business ( email )

Boulder, CO 80309-0419
United States

Giovanna Nicodano

University of Turin - Department ESOMAS ( email )

Turin, 10134
Italy

HOME PAGE: http://https://www.carloalberto.org/person/giovanna-nicodano/

Collegio Carlo Alberto ( email )

Piazza Arbarello 8
Torino, Torino 10121
Italy
390116705006 (Phone)

HOME PAGE: http://https://www.carloalberto.org/person/giovanna-nicodano

EGCI ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Netspar ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

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