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Optimal Contracting and Insider Trading Restrictions

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  • Fischer, Paul E

Abstract

Restrictions on trading by insider agents are analyzed using an optimal contracting framework. Prohibition of insider trading is shown to be Pareto preferred if, and only if, a revelation or moral hazard problem exists. If prohibition of insider trading is valuable, then trade registration with a delay is shown to be as valuable as a complete prohibition. Short-selling restrictions, however, are generally of less value than complete prohibition. Finally, regulation of insider agent trading by governmental institutions and/or professional associations is discussed. Copyright 1992 by American Finance Association.

Suggested Citation

  • Fischer, Paul E, 1992. "Optimal Contracting and Insider Trading Restrictions," Journal of Finance, American Finance Association, vol. 47(2), pages 673-694, June.
    • Handle: RePEc:bla:jfinan:v:47:y:1992:i:2:p:673-94
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    Cited by:

    1. Milo Bianchi & Rose-Anne Dana & Elyès Jouini, 2022. "Equilibrium CEO contract with belief heterogeneity," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 74(2), pages 505-546, September.
    2. Art Durnev & Amrita Nain, "undated". "The Unanticipated Effects of Insider Trading Regulation," American Law & Economics Association Annual Meetings 1023, American Law & Economics Association.
    3. Wei Zhang & Steven F. Cahan & Arthur C. Allen, 2005. "Insider Trading and Pay‐Performance Sensitivity: An Empirical Analysis," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 32(9‐10), pages 1887-1919, November.
    4. Dodd, Olga & Louca, Christodoulos & Paudyal, Krishna, 2015. "The determinants of foreign trading volume of stocks listed in multiple markets," Journal of Economics and Business, Elsevier, vol. 79(C), pages 38-61.
    5. Durnev, Art A. & Nain, Amrita S., 2007. "Does insider trading regulation deter private information trading? International evidence," Pacific-Basin Finance Journal, Elsevier, vol. 15(5), pages 409-433, November.
    6. Andrea M. Buffa & Giovanna Nicodano, 2008. "Should Insider Trading be Prohibited when Share Repurchases are Allowed?," Review of Finance, European Finance Association, vol. 12(4), pages 735-765.
    7. Art A. Durnev & Amrita S. Nain, 2007. "The Effectiveness of Insider Trading Regulation: International Evidence," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 5(1), pages 10-15, 05.
    8. Vahe Lskavyan, 2015. "Insider regulation and the incentive to invest as an insider," Economics of Governance, Springer, vol. 16(3), pages 207-227, August.
    9. Wei Zhang & Steven F. Cahan & Arthur C. Allen, 2005. "Insider Trading and Pay-Performance Sensitivity: An Empirical Analysis," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 32(9-10), pages 1887-1919.
    10. Hu, May & Narayan, Paresh & Park, Jason & Verhoeven, Peter, 2022. "Informed trading in the CDS and OTM put option markets," International Review of Economics & Finance, Elsevier, vol. 79(C), pages 353-367.
    11. Narayanan, Ranga, 2000. "Insider trading and the voluntary disclosure of information by firms," Journal of Banking & Finance, Elsevier, vol. 24(3), pages 395-425, March.
    12. Peter M. DeMarzo & Michael J. Fishman & Kathleen M. Hagerty, 1998. "The Optimal Enforcement of Insider Trading Regulations," Journal of Political Economy, University of Chicago Press, vol. 106(3), pages 602-632, June.
    13. Maug, Ernst, 2002. "Insider trading legislation and corporate governance," European Economic Review, Elsevier, vol. 46(9), pages 1569-1597, October.
    14. Mazza, Paolo & Ruh, Benjamin, 2022. "The performance of corporate legal insider trading in the Korean market," International Review of Law and Economics, Elsevier, vol. 71(C).

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