Should Insider Trading be Prohibited when Share Repurchases are Allowed?
32 Pages Posted: 3 Mar 2007
There are 2 versions of this paper
Should Insider Trading be Prohibited when Share Repurchases are Allowed?
Should Insider Trading Be Prohibited When Share Repurchases are Allowed?
Date Written: February 2007
Abstract
This paper considers share repurchases as the way long-term shareholders preserve their ability to use corporate information for speculative purposes when insider trading regulation is enforced. This use of corporate information increases the adverse selection losses of short-term shareholders. Thus, buy-back programs reduce their incentive to invest in stocks that back the most productive technology, leading to a socially inefficient equilibrium. It follows that insider trading should not be banned when share repurchases are allowed.
Keywords: information trading, share repurchases, liquidity, disclosure
JEL Classification: D82, G35, G38
Suggested Citation: Suggested Citation
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