The Law and Economics of Insider Trading: A Comprehensive Primer

Abstract

Insider trading likely is one of the most common forms of securities fraud, yet it remains one of the most controversial aspects of securities regulation among legal (and economic) scholars. This paper provides a comprehensive overview of both the law of insider trading and the contested economic analysis thereof. The paper adopts a historical approach to the doctrinal aspects of insider trading, beginning with turn of the 20th Century state common law, and tracing the prohibition's evolution up to the most recent U.S. Supreme Court decisions under Rule 10b-5. The paper then reviews the debate between those scholars favoring deregulation of insider trading, allowing corporations to set their own insider trading policies by contract, and those who contends that the property right to inside information should be assigned to the corporation without the right of contractual reassignment. The paper also reviews the public choice analysis of insider trading to show that the prohibition benefits market professionals and corporate managers rather than investors.