Research Handbook on Insider Trading
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Research Handbook on Insider Trading

  • Research Handbooks in Corporate Law and Governance series

Edited by Stephen M. Bainbridge

In most capital markets, insider trading is the most common violation of securities law. It is also the most well known, inspiring countless movie plots and attracting scholars with a broad range of backgrounds and interests, from pure legal doctrine to empirical analysis to complex economic theory. This volume brings together original cutting-edge research in these and other areas written by leading experts in insider trading law and economics.
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Chapter 10: What governmental insider trading teaches us about corporate insider trading

Sung Hui Kim

Extract

There has been much academic debate about whether corporate insider trading should be banned. As Stephen Bainbridge recounts in the Introduction to this volume, that debate was sparked by Henry Manne’s influential 1966 book, Insider Trading and the Stock Market. Manne contended that corporate insider trading should be deregulated because the benefits to both society and the firm whose stock was traded outweighed the costs. He provided two basic rationales. First, Manne argued that corporate insider trading has the effect of moving securities prices toward the level that they would have reached had the inside information been made public. This increase in price accuracy helps allocate capital to its most productive uses. Secondly, and more provocatively, Manne argued that corporate insider trading was “the most appropriate device for compensating entrepreneurs in large corporations.” Unlike ordinary managers whose service is easy to monitor and “can be purchased like any commodity in the marketplace,” it is difficult to ascertain the value of an entrepreneur’s services in the form of a predetermined salary. Instead, Manne argued, insider trading provides a means by which companies can compensate entrepreneurs for the value of their innovations.

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