Insider Trading via the Corporation

Abstract

When a U.S. firm trades its own shares in the open market, it is subject to much less stringent trade-disclosure rules than an insider of the firm trading in those shares. Insiders owning equity in their firm thus frequently engage in indirect insider trading: having the firm buy and sell its own stock at favorable prices. Such indirect insider trading imposes substantial costs on public investors in two ways: by systematically diverting value to insiders and by causing insiders to take steps that destroy economic value. To reduce these costs, I put forward a simple proposal: subject firms to the same trade-disclosure rules imposed on their insiders.

Keywords: insider trading, corporate governance, stock buybacks, share repurchases, open market repurchases, equity issuances, at-the-market offerings, overvalued equity, payout policy, seasoned equity offerings, manipulation, real earnings management

JEL Classification: G18, G32, G34, G35, G38, K22