The Placebo Effect of Insider Dealing Regulation

Area of Science:

• Finance
• Corporate Governance
• Market Regulation

Background:

• Insider trading, both traditional and shadow, involves leveraging material non-public information.
• Traditional insider trading concerns a firm's own stock, while shadow trading involves related companies' stock.
• Existing regulatory frameworks primarily target traditional insider trading.

Purpose of the Study:

• To analyze the market and corporate governance consequences of traditional and shadow trading.
• To investigate the effectiveness of current insider trading regulations in protecting outside investors.
• To explore the potential efficiency of the current regulatory arrangement despite its flaws.

Main Methods:

• Comparative analysis of traditional and shadow trading impacts.
• Review of regulatory approaches in the EU, UK, and US.
• Survey of 200 retail investors to gauge their perceptions and experiences.

Main Results:

• Traditional and shadow trading yield similar consequences for financial markets and corporate governance.
• Regulators focus on traditional insider trading, neglecting shadow trading.
• Retail investors may be lulled into a false sense of security by regulations targeting only traditional insider trading.

Conclusions:

• Current insider trading regulations may not fully protect outside investors, as shadow trading remains a viable profit avenue for insiders.
• The placebo effect of traditional insider trading bans might inadvertently facilitate insider profits through shadow trading.
• Despite concerns for investor protection, the current regulatory landscape might possess a degree of economic efficiency.