The Impact of Insider Trading on the Market Price of Securities: Some Evidence from Recent Cases of Unlawful Trading
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The government's recent crackdown on insider trading has revived an old debate about the wisdom of insider trading prohibitions. Opponents of insider trading laws often argue that insider trading contributes to market efficiency because it brings information to the market which gets incorporated into the price of the security, leading to more accurate pricing in a more timely fashion. Although this argument is intuitively appealing and has some empirical support, a look at some recent cases of known insider trading reveals situations where the market fails to detect the presence of informed traders, and even instances where the stock price moves in the contrary direction. This indicates that insider. trading does not always bring information to the market, which undermines what is perhaps the most cogent argument for ending insider trading prohibitions.