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Substitutes for Insider Trading

91 Pages Posted: 2 Apr 2001  

Ian Ayres

Yale University - Yale Law School; Yale University - Yale School of Management

Joseph Bankman

Stanford Law School

Date Written: 2001

Abstract

When insider trading prohibitions limit the ability of insiders (or of a corporation itself) to use material non-public information to trade a particular firm's stock, there may be incentive to use the information to trade instead on the stock of that firm's rivals, suppliers, customers, or the manufacturers of complementary products. We refer to this form of trading as trading in stock substitutes. Stock substitute trading by a firm is legal. In many circumstance, substitute trading by employees is also legal. Trading in stock substitutes may be quite profitable, and there is anecdotal evidence that employees often engage in such trading. Our analysis suggests that substitute trading is less socially desirable than traditional insider trading. We recommend a set of disclosure rules designed to clarify existing law and provide information on the extent of stock substitute trading. We also discuss possible changes in the law that might limit inefficient trading in stock substitutes.

Suggested Citation

Ayres, Ian and Bankman, Joseph, Substitutes for Insider Trading (2001). Stanford Law and Economics Olin Working Paper No. 214; Yale Law & Economics Research Paper No. 252. Available at SSRN: https://ssrn.com/abstract=265408 or http://dx.doi.org/10.2139/ssrn.265408

Ian Ayres (Contact Author)

Yale University - Yale Law School ( email )

P.O. Box 208215
New Haven, CT 06520-8215
United States
203-432-7101 (Phone)
203-432-2592 (Fax)

Yale University - Yale School of Management

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

Joseph Bankman

Stanford Law School ( email )

559 Nathan Abbott Way
Stanford, CA 94305-8610
United States
650-725-3825 (Phone)
650-725-7663 (Fax)

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