Insider Trading: A Clash between Law and Economics

Oxford Research Encyclopedia of Economics and Finance, 2020

Posted: 11 Mar 2020

See all articles by Stephen F. Diamond

Stephen F. Diamond

Santa Clara University - School of Law

Date Written: January 8, 2020

Abstract

Insider trading is not widely understood. Insiders of corporations can, in fact, buy and sell shares of those corporations. But, over time, Congress, the courts and the Securities and Exchange Commission (SEC) have imposed significant limits on such trading. The limits are not always clearly marked and the principles underlying them not always consistent. The core principle is that it is illegal to trade if one is in the possession of material, nonpublic information. But the rationality of this principle has been challenged by successive generations of law and economics scholars, most notably Manne, Easterbrook, Epstein, and Bainbridge. Their “economic” analysis of this contested area of the law provides, arguably, at least a more consistent basis upon which to decide when trades by insiders should, in fact, be disallowed. A return to genuine “first principles” generated by the nature of capitalism, however, allows for more powerful insights into the phenomenon and could lead to more effective regulation.

Keywords: insider trading, securities fraud, market efficiency, information, capitalism, property rights, fairness, le­gitimacy

Suggested Citation

Diamond, Stephen F., Insider Trading: A Clash between Law and Economics (January 8, 2020). Oxford Research Encyclopedia of Economics and Finance, 2020, Available at SSRN: https://ssrn.com/abstract=3534830

Stephen F. Diamond (Contact Author)

Santa Clara University - School of Law ( email )

500 El Camino Real
Santa Clara, CA 95053
United States

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