What Inside Information Is Worth and Why It Matters

Abstract

Allowing people to trade on inside information invites wasteful competition. The private rewards from acquiring and trading using inside information far, far exceed any social benefits from such trading. Recognizing and analyzing the magnitude of this problem reinvigorates the case for prohibiting insider trading and provides new guidance as to the optimal composition of such a prohibition. The time has come for the United States to replace the current insider trading regime, which is based largely on federal common law fraud grounds, with a legislatively-crafted insider trading prohibition that bans all trading when one is cognizant that they are in possession of certain information, such as information about quarterly earnings, an imminent tender offer, the results of a clinical trial, a share offering, a share repurchase, or an earnings restatement.