by Binay K. Adhikari, Anup Agrawal, and Bina Sharma

Does insider trading regulation actually deter insider trading? This is an unsettled question, on which prior empirical findings have been mixed. One set of studies finds that insider trading regulations have been effective in reducing the frequency and profitability of opportunistic trades,[1] while several other studies cast doubt on the efficacy of regulations.[2] Why do studies disagree on this question? A possible reason is the difficulties inherent in evaluating the effects of regulation on insider trading. These difficulties fall into two main categories: First, most modern insider trading laws in the United States are adopted at the federal level[3] and are designed to affect all firms at the same time. That makes it difficult to tell whether any changes in insider trading are due to the law or some other contemporaneous event. Second, a decrease in insider trading after the passage of a stricter law or an increase in enforcement can either be an effect of such action or simply a return to a more normal level of insider trading after an elevated period that led to the law being passed. Perhaps recognizing these issues, Utpal Bhattacharya concludes his extensive review of the insider trading literature with the verdict, “[w]e need methodologies (such as natural experiments) to evaluate the efficacy of current and future insider trading rules.”[4] Continue reading →