A Middle Ground Position in the Insider Trading Debate: Deregulate the Sell Side

Abstract

Participants in the forty-year debate over whether insider trading should be liberalized have generally treated insider sales the same as insider purchases - they have argued that all such insider transactions should be either regulated or liberalized. This article contends that there is a principled basis for treating price-decreasing insider trading (e.g., insider sales) more leniently than price-increasing insider trading (e.g., insider purchases). Because equity overvaluation is more likely than equity undervaluation to occur and persist and is more likely to occasion harm to the corporate enterprise when it does occur, corporate constituents (managers and shareholders) would likely value a policy that permits price-decreasing insider trading more than a policy that permits price-increasing insider trading. Thus, the majoritarian default rule may be an asymmetric policy under which price-decreasing insider trading is generally permitted while price-increasing insider trading is generally forbidden.

Keywords: insider trading, equity overvaluation, overvaluation, mispricing, stock market efficiency, Rule 10b-5, securities regulation

JEL Classification: D82, G14, G18, K22