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Insider Trading and the Efficiency of Stock Prices

Michael J. Fishman and Kathleen M. Hagerty
The RAND Journal of Economics
Vol. 23, No. 1 (Spring, 1992), pp. 106-122
Published by: Wiley on behalf of RAND Corporation
Stable URL: http://www.jstor.org/stable/2555435
Page Count: 17
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Insider Trading and the Efficiency of Stock Prices
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Abstract

We analyze several aspects of the debate on insider trading regulations. Critics of such regulations cite various benefits of insider trading. One prominent argument is that insider trading leads to more informationally efficient stock prices. We show that under certain circumstances, insider trading leads to less efficient stock prices. This is because insider trading has two adverse effects on the competitiveness of the market: it deters other traders from acquiring information and trading, and it skews the distribution of information held by traders toward one trader. We also discuss whether shareholders of a firm have the incentive to restrict insider trading on their own.

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