The Impact of Insider Trading Doctrine on the Incidence of Insider Trading: An Analysis of the Effect of the Misappropriation Theory

33 Pages Posted: 29 Nov 2023 Last revised: 5 Mar 2024

See all articles by Fernan Restrepo

Fernan Restrepo

University of California - Los Angeles

Date Written: November 8, 2023

Abstract

Insider trading attracts unique attention in corporate and securities law, but despite the salience of the practice, there is limited empirical evidence on whether the law is effective at preventing it, and particularly whether the adoption of the main doctrine that forms the basis of the insider trading prohibition today – the doctrine of the “misappropriation theory” – had a meaningful deterrent effect. This paper examines this question by studying the impact of the Supreme Court’s decision in O’Hagan, which adopted the misappropriation theory, on target run-ups in mergers and acquisitions (a common proxy for insider trading). The data show that run-ups decreased significantly and immediately in relation to announcement returns after O’Hagan, which suggests that the misappropriation theory in fact deterred insider trading.

JEL Classification: K20, K22

Suggested Citation

Restrepo, Fernan, The Impact of Insider Trading Doctrine on the Incidence of Insider Trading: An Analysis of the Effect of the Misappropriation Theory (November 8, 2023). Available at SSRN: https://ssrn.com/abstract=4627327 or http://dx.doi.org/10.2139/ssrn.4627327

Fernan Restrepo (Contact Author)

University of California - Los Angeles ( email )

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