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Does Insider Trading Law Change Behavior? An Empirical Analysis

59 Pages Posted: 29 Sep 2017 Last revised: 30 Nov 2017

Menesh Patel

Columbia Law School and Columbia Business School, Program in the Law and Economics of Capital Markets

Date Written: November 20, 2017

Abstract

Few issues in securities law have excited the popular imagination and generated scholarly interest like insider trading. Yet, a simple but foundational question about insider trading law has received relatively little scholarly attention: Does insider trading law actually influence the amount of insider trading that occurs? This Article tackles this question in the context of one of the highest-profile changes in insider trading law in decades — the Second Circuit’s seminal 2014 decision in United States v. Newman, which substantially weakened insider trading law concerning so called “tippee” liability. The Article’s empirical approach exploits Newman’s change in law to empirically evaluate the effects of changes in insider trading law on insider trading. The Article focuses on insider trading in advance of mergers announced in periods before and after Newman and, for its measure of the extent of insider trading, uses the runup in the stock price of the merger target in advance of the merger’s public announcement. Based on that measure, the Article finds that Newman had a dramatic effect on insider trading, with significantly greater insider trading occurring after Newman than before, thereby providing empirical evidence that insider trading is responsive to changes in insider trading law. The Article provides the first empirical analysis of whether and the extent to which a specific judicial change in insider trading law can influence the amount of insider trading beyond just the trading of corporate insiders. The Article’s empirical findings advance our understanding of the functioning of securities law and inform important policy debates concerning insider trading.

Keywords: Insider Trading, Empirical, Newman, Tippee Liability

JEL Classification: K22

Suggested Citation

Patel, Menesh, Does Insider Trading Law Change Behavior? An Empirical Analysis (November 20, 2017). Available at SSRN: https://ssrn.com/abstract=3044118

Menesh Patel (Contact Author)

Columbia Law School and Columbia Business School, Program in the Law and Economics of Capital Markets ( email )

435 West 116th Street
New York, NY 10025
United States

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