Book Chapter

Preventing Stock Market Crises (IV): Regulating Trading by Corporate Insiders

Wang, Michael H., Yan, Xin, Klein, Lawrence R., Gyurcs´any, Ferenc, Dalko, Viktoria

2012

Overview

Corporate insiders may trade shares in their companies by utilizing their information advantage, such as access to manipulated earnings information. Once announced publicly by a credible disseminator with a large investor audience, this information advantage is attached to publicity and credibility. Subsequently, an information monopoly is formed. Trading strategies utilizing the publicized information advantage are therefore an exercise of monopolistic power. This type of trading by corporate insiders damages the fairness and integrity of the secondary market, and negatively impacts investor protection, market stability, and even crisis prevention. The existing insider trading regulations in the United States and many other nations are powerful, but their effectiveness is low when being enforced. This chapter proposes to add four new measures based on the financial reality that will provide securities regulators with controllable tools to implement. These tools pose a daily limit on trading volumes and share withholding percentage on corporate insiders. In addition, if the company's stock displays abnormal price behavior prior to the information release date, regulators have the right to postpone and investigate if there was any information leak in advance of public release. It is proposed that the CEO bear responsibility for such an event. These measures are quantifiable, are relatively easy to implement, and can be adjusted according to the regulatory priorities and local realities affecting securities regulators.

• Publisher: John Wiley & Sons, Inc
• Subject: corporate insiders / earnings manipulation / market stability / SEC regulations / trading
• ISBN: 9781118094815, 1118094816