Insider Trading Laws as a Defeat Device

27 Pages Posted: 29 Apr 2019 Last revised: 20 May 2019

See all articles by Dirk G. Baur

Dirk G. Baur

University of Western Australia - Business School; Financial Research Network (FIRN)

Thomas Dimpfl

University of Tuebingen - Department of Statistics and Econometrics

Date Written: May 2019

Abstract

Insider trading laws are designed to ensure a level-playing field and trust in financial markets at the expense of less efficient markets. This paper argues that insider trading laws fail to ensure a level-playing field and instead facilitate fraud and undermine trust and fairness. We use a model to show that insider trading laws result in delayed price movements, lower liquidity, increased volatility and crash risk. A welfare analysis further shows that informed traders benefit the most from insider trading laws. An empirical example, the Volkswagen Diesel scandal, supports the predictions of the theoretical model and relates the emissions testing defeat device to insider trading laws that act as an informational defeat device.

Keywords: insider trading, trust, efficient markets, illusion, defeat device, extreme price movements, crash risk, manipulation

JEL Classification: G14, G18

Suggested Citation

Baur, Dirk G. and Dimpfl, Thomas, Insider Trading Laws as a Defeat Device (May 2019). Available at SSRN: https://ssrn.com/abstract=3361444 or http://dx.doi.org/10.2139/ssrn.3361444

Dirk G. Baur (Contact Author)

University of Western Australia - Business School ( email )

School of Business
35 Stirling Highway
Crawley, Western Australia 6009
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Thomas Dimpfl

University of Tuebingen - Department of Statistics and Econometrics ( email )

Germany

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