The Effect of Insider Trading Rules on Information Generation and Disclosure by Corporations.

Abstract ABSTRACT: The paper examines the possible effects of insider trading rules on the incentives for firms to produce and disseminate information about themselves. The incentives to produce and disseminate information are examined analytically, both within a market free of insider trading rules and within a market with the existing insider trading rules. Thus, the incremental effect of insider trading rules on the incentives is assessed. It is concluded that the net effect of insider trading rules will most likely inhibit the generation, processing, and communication of inside information. And to the extent that insider information has allocative effects, the net effect of insider trading rules will be the deterrents of the production and dissemination of information that improves the allocation of resources. To the extent that insider trading rules are designed to prevent undesirable redistributions of wealth that could result from monopolistic access to information, and if this goal is to be taken for granted, then a more extensive regulation of what information is to be produced and disclosed may be needed to insure that information useful for allocation decisions is produced by the firm.