Overvalued Equity and the Case for an Asymmetric Insider Trading Regime

90 Pages Posted: 13 Mar 2006

See all articles by Thomas A. Lambert

Thomas A. Lambert

University of Missouri - School of Law

Date Written: March 10, 2006

Abstract

The forty-year debate over whether insider trading should be regulated has generally proceeded in all-or-nothing terms: Either all insider trading should be permitted (subject only to private restrictions imposed by issuers themselves), or none should. This Article argues for an asymmetric insider trading policy under which insider trading that decreases the price of an overvalued stock is generally permitted, but insider trading that increases the price of an undervalued stock is generally prohibited. Concluding that the net investor benefits of price-decreasing insider trading exceed those of price-enhancing insider trading, the Article argues that an asymmetric insider trading regime likely represents the bargain that shareholders and corporate managers would strike if they were legally and practically able to negotiate an insider trading policy. Current insider trading doctrine would permit regulators to impose such an asymmetric insider trading policy as the default rule.

Keywords: insider trading, stock mispricing, overvalued equity, overvaluation, securities law, behavioral finance, stock markets, agency costs

JEL Classification: G18, G38, K22

Suggested Citation

Lambert, Thomas Andrew, Overvalued Equity and the Case for an Asymmetric Insider Trading Regime (March 10, 2006). U of Missouri-Columbia School of Law Legal Studies Research Paper No. 2006-09. Available at SSRN: https://ssrn.com/abstract=890233 or http://dx.doi.org/10.2139/ssrn.890233

Thomas Andrew Lambert (Contact Author)

University of Missouri - School of Law ( email )

Missouri Avenue & Conley Avenue
Columbia, MO MO 65211
United States

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