Can agency theory justify the regulation of insider trading?

  • Alexandre Padilla


The insider trading debate traditionally discusses the pros and cons of insider trading and draws a conclusion about the desirability or undesirability of public regulation of insider trading. One of the most important arguments against insider trading is that it generates agency problems that shareholders cannot resolve and that, therefore, insider trading should be publicly regulated. We have challenged this argument for failing to engage in comparative institutional analysis. We argued that when the negative aspects of insider trading, namely, the agency problems that it may create, are considered, it is necessary to engage in comparative institutional analysis and how these problems can be resolved under two different economic systems: the market economy and interventionism.

We have been led to the conclusion that under a market economy, shareholders do have mechanisms to protect themselves against agency problems generated by insider trading and that these problems are reduced to a minimum. We have shown that interventionism hampers the functioning and reduces the disciplinary role of such mechanisms. Therefore, insiders have indeed more latitude to engage in these discretionary behaviors, pointed out by the supporters of the insider-trading-as-an-agency-problem argument, that harm shareholders. Finally, we have shown that the failures of government regulation reinforce this tendency of insiders’ behavior.

We conclude that we cannot justify a public regulation of insider trading based on the insider-trading-as-agency-problem argument.


Corporate Governance Agency Theory Agency Problem Minority Shareholder Inside Trading 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Alchian, Armen A. 1969. “Corporate Management and Property Rights.” In Manne, ed. 1969. Pp. 337–60.Google Scholar
  2. —————. 1977. “Some Economics of Property Rights.” In Alchian, Economic Forces at Work. Indianapolis, Ind.: Liberty Press. Pp. 127–49.Google Scholar
  3. Alchian, Armen A., and Harold Demsetz. 1972. “Production, Information Costs, and Economic Organization.” American Economic Review 62 (5): 777–95.Google Scholar
  4. Assemblée Nationale. 2001. “Projet de loi adopté avec modifications par l’assemblée nationale, en deuxième lecture, de modernisation sociale.” Texte adopté No. 686. Http:// Scholar
  5. Beny, Laura N. 1999. “A Comparative Empirical Investigation of Agency and Market Theories of Insider Trading.” Discussion Paper No. 264, Cambridge, Mass.: Harvard Law School. James M. Olin Center for Law, Economics, and Business. Http:// Scholar
  6. Benston, George J. 1969. “The Effectiveness and Effects of the SEC’s Accounting Disclosure Requirements.” In Manne, ed. 1969. Pp. 23–79.Google Scholar
  7. —————. 1973. “Required Disclosure and the Stock Market: An Evaluation of the Securities Exchange Act of 1934.” American Economic Review 63(1): 132–55.Google Scholar
  8. —————. 1982. “Security for Investors.” In Instead of Regulation: Alternatives to Federal Regulatory Agencies. Robert W. Poole, Jr., ed. Lexington, Mass.: Lexington Books. Pp. 169–205.Google Scholar
  9. —————. 1998. Regulating Financial Markets: A Critique and Some Proposals. Hobart Paper 135. London: Institute of Economic Affairs.Google Scholar
  10. Berle Adolf A., Jr. and Gardiner C. Means. [1932] 1935. The Modern Corporation and Private Property. New York: Macmillan.Google Scholar
  11. Block, Walter E. 1976. Defending the Undefendable. New York: Fleet Press.Google Scholar
  12. Block, Walter E., and Robert W. McGee. 1992. “Insider Trading.” In Business Ethics and Common Sense. Robert W. McGee, ed. Westport, Conn.: Quarum Books. Pp. 219–29.Google Scholar
  13. Brickley, James A. et al. 2000. “Pricing With Market Power.” Managerial Economics and Organizational Architecture. New York: McGraw-Hill.Google Scholar
  14. —————. et al. 1997. Managerial Economics and Organizational Architecture. Chicago: Irwin.Google Scholar
  15. Bris, Arturo. 2000. “Do Insider Trading Laws Work?” Yale ICF Working Paper No. 00-19. Http:// Scholar
  16. Brudney, Victor. 1979. “Insiders, Outsiders and Informational Advantages under the Federal Securities Laws.” Harvard Law Review 93:322–76.CrossRefGoogle Scholar
  17. Burton-Marsteller. 2001. “Y2K: Maximizing CEO Reputation: Company’s Reputation, For Better or Worse, Increasingly Linked to CEO’s Reputation.” Http:// Scholar
  18. Campan, Gael J. 1999. “Does Justice Qualify as an Economic Good?: A Böhm-Bawerkian Perspective.” Quarterly Journal of Austrian Economics 2(1): 21–33.CrossRefGoogle Scholar
  19. Carlton, Dennis W., and Daniel R. Fischel. 1983. “The Regulation of Insider Trading.” Stanford Law Review 35(5): 857–95.CrossRefGoogle Scholar
  20. Coase, Ronald H. 1964. “Discussion,” American Economic Review 54(3): 194–97.Google Scholar
  21. Code of Federal Regulations. 2001. 17CFR240.14e-3. Http:// Scholar
  22. Council Directive 80/390/EEC. 1980. Http:// Scholar
  23. Council Directive 82/121/EEC. 1982. Http:// Scholar
  24. Council Directive 88/627/EEC. 1988. Scholar
  25. Council Directive 89/298/EEC. 1989. Http:// Scholar
  26. Council Directive 89/592/EEC. 1989. Http:// Scholar
  27. Demsetz, Harold. 1969. “Perfect Competition, Regulation, and the Stock Market.” In Manne, ed. 1969. Pp. 1–22.Google Scholar
  28. —————. 1989. “Information and Efficiency: Another Viewpoint.” In Demsetz, Efficiency, Competition, and Policy. Cambridge. Mass: Basil Blackwell. Pp. 3–24.Google Scholar
  29. Easterbrook, Frank H. 1981. “Insider Trading, Secret Agents, Evidentiary Privileges, and the Production of Information.” Supreme Court Review. Pp. 309–65.Google Scholar
  30. ————— 1985. “Insider Trading as an Agency Problem.” In Principals and Agents: The Structure of Business. John W. Pratt and Richard J. Zeckhauser, eds. Boston: Harvard Business School Press. Pp. 81–99.Google Scholar
  31. Easterbrook, Frank H., and Daniel R. Fischel. 1996. The Economic Structure of Corporate Law. Cambridge. Mass.: Harvard University Press.Google Scholar
  32. European Corporate Governance Network. 1997. “The Separation of Ownership and Control: A Survey of 7 European Countries, Preliminary Report to the European Commission, Brussels: European Corporate Governance Network.” Http:// Scholar
  33. Fama, Eugene F. 1980 “Agency Problems and the Theory of the Firm.” Journal of Political Economy 88:288–307.CrossRefGoogle Scholar
  34. Fombrun, Charles, and Cees Van Riel. 1997. “The Reputation Landscape.” Corporate Reputation Review 1(1/2): 1–13.Google Scholar
  35. Foss, Nicolai J. 1994. “The Theory of the Firm: The Austrians as Precursors and Critics of Contemporary Theory.” Review of Austrian Economics 7(1): 31–65.CrossRefGoogle Scholar
  36. Foster, F. Douglas, and S. Viswanathan. 1993. “Variations in Trading Volume, Return Volatility, and Trading Costs on Recent Price Formation Models.” Journal of Finance 48(1): 187–211.CrossRefGoogle Scholar
  37. Georges, Alain. 1976. L’utilisation en bourse d’informations privilégiées dans le droit des Etats-Unis. Paris: Economica.Google Scholar
  38. Grossman, Sanford J., and Oliver Hart. 1980. “Takeover Bids, The Free Rider Problem and the Theory of the Corporation.” Bell Journal of Economics 11:42–64.CrossRefGoogle Scholar
  39. Haft, Robert J. 1982. “The Effect of Insider Trading Rules on the Internal Efficiency of the Large Corporation.” Michigan Law Review 80:1051–71.CrossRefGoogle Scholar
  40. Hart, Oliver. 1995. “Corporate Governance: Some Theory and Implications.” The Economic Journal 105(430): 678–89.CrossRefGoogle Scholar
  41. Hart, Oliver, and John Moore. 1990. “Property Rights and the Nature of the Firm.” Journal of Political Economy 98(6): 119–58.CrossRefGoogle Scholar
  42. Hayek, Friedrich A. 1995. Droit, Législation et Liberté. Vol. 2. Le Mirage de la Justice Sociale. Paris: Quadrige, PUF.Google Scholar
  43. Hewitt, Jeffrey J. 2001. “Linux Server Market Share: Where Will It Be in 2001 and How Will It Grow?” Gartner, Inc. Http:// Scholar
  44. Holden, Craig W., and Avanidhar Subrahmanyam. 1992. “Long-lived Private Information and Imperfect Competition.” Journal of Finance 47(1): 247–70.CrossRefGoogle Scholar
  45. Holmstrom, Bengt. 1982. “Moral Hazard in Teams.” Bell Journal of Economics 13:314–40.CrossRefGoogle Scholar
  46. Jarrell, Gregg A. et al. 1988. “The Market for Corporate Control: The Empirical Evidence Since 1980.” Journal of Economic Perspectives 2(1): 49–68.Google Scholar
  47. Jensen, Michael C. 1984. “Takeovers: Folklore and Science.” Harvard Business Review (November–December): 109–21.Google Scholar
  48. -----. 1985. “The Efficiency of Takeovers.” The Corporate Board: 16–22. Electronic version available. Http:// Scholar
  49. -----. 1986. “The Takeover Controversy: Analysis and Evidence.” Midland Corporate Finance Journal 4(2). Electronic version available. Http:// Scholar
  50. —————. 1988. “Takeovers: Their Causes and Consequences.” Journal of Economic Perspectives 2(1): 21–48.Google Scholar
  51. ————— 1993. “The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems.” Journal of Finance 48(3): 831–80.CrossRefGoogle Scholar
  52. Kinsella, N. Stephan. 2001a. “Against Intellectual Property.” Journal of Libertarian Studies 15(2): 1–53.Google Scholar
  53. -----. 2001b. “A Theory of Contracts: Binding Promises, Title Transfer, and Inalienability.” Journal of Libertarian Studies. Forthcoming.Google Scholar
  54. Klein, Peter G. 1996. “Economic Calculation and the Limits of Organization.” Review of Austrian Economics 9(2): 3–28.CrossRefGoogle Scholar
  55. ————— 1999. “Entrepreneurship and Corporate Governance.” Quarterly Journal of Austrian Economics 2(2): 19–42.CrossRefGoogle Scholar
  56. La Porta, Rafael et al. 1997. “Legal Determinants of External Finance.” Journal of Finance 52(3): 1131–50.CrossRefGoogle Scholar
  57. —————. 1998. “Law and Finance.” Journal of Political Economy 106(6): 1113–55.CrossRefGoogle Scholar
  58. —————. 1999. “Corporate Ownership Around the World.” Journal of Finance 54(2): 471–517.CrossRefGoogle Scholar
  59. Leftwich, R., and R. Verrecchia. 1981. “Insider Trading and Managers’ Choice Among Risk Projects.” CRSP Working Paper No. 63. University of Chicago Graduate School of Business (August).Google Scholar
  60. Lepage, Henri. 1985. Pourquoi la Propriété. Paris: Hachette.Google Scholar
  61. Levmore, Saul. 1982. “Securities and Secrets: Insider Trading and the Law of Contracts.” Virginia Law Review 68:117–60.CrossRefGoogle Scholar
  62. Macey, Jonathan R. 1984. “From Fairness to Contract: The New Direction of the Rules against Insider Trading.” Hofstra Law Review 13:9–64.Google Scholar
  63. ————— 1991. Insider Trading: Economics, Politics, and Policy. Washington, D.C.: AEI Press.Google Scholar
  64. Manne, Henry G. 1965. “Mergers and the Market for Corporate Control.” Journal of Political Economy 73(2): 110–20.CrossRefGoogle Scholar
  65. —————. 1966. Insider Trading and the Stock Market. New York: The Free Press.Google Scholar
  66. —————, ed. 1969. Economic Policy and the Regulation of Corporate Securities. Washington, D.C.: American Enterprise Institute.Google Scholar
  67. Martin, Kenneth J., and McConnell. 1991. “Corporate Performance, Corporate Takeovers, and Management Turnover.” Journal of Finance 46(2): 671–87.CrossRefGoogle Scholar
  68. Maug, Ernst. 1999. “Insider Trading Legislation and Corporate Governance.” Research Paper. Scholar
  69. Mendelson, Morris. 1969. “The Economics Board of Insider Trading Reconsidered.” University of Pennsylvania Law Review 117:470–92.CrossRefGoogle Scholar
  70. Menger, Carl. 1981. Principles of Economics. New York: New York University Press.Google Scholar
  71. Mises, Ludwig von. 1964. Rampart’s College Lectures. Auburn, Ala.: Mises Institute. Robert LeFevre Collection.Google Scholar
  72. —————. 1977. A Critique of Interventionism. New Rochelle, N.Y.: Arlington House.Google Scholar
  73. —————. [1969] 1981. Socialism. Indianapolis, Ind.: Liberty Classics.Google Scholar
  74. —————. [1944] 1983. Bureaucracy. Cedar Falls, Iowa: Center for Futures Education.Google Scholar
  75. —————. [1940] 1998. Interventionism: An Economic Analysis. Irvington-on-Hudson, N.Y.: Foundation for Economic Education.Google Scholar
  76. —————. [1949] 1998b. Human Action: A Treatise on Economics. Scholar’s Edition. Auburn, Ala.: Ludwig von Mises Institute.Google Scholar
  77. Moran v. Household International, 500 A. 2d 1346 (Del. 1985). Scholar
  78. Morck, Randall et al. 1989. “Alternative Mechanisms for Corporate Control.” American Economic Review 79(4): 842–52.Google Scholar
  79. Posner, Richard A. 1977. Economic Analysis of Law. 2nd ed. Boston: Little, Brown.Google Scholar
  80. Raith, Michael. 2001. “Competition, Risk and Managerial Incentives.” Working Paper. Electronic version available. Http:// Scholar
  81. Ribstein, Larry E. 2000. “Efficiency, Politics and Evolution in Corporate Law.” Working Paper. George Mason University School of Law (June 26).Google Scholar
  82. Roe, Mark J. 1994. Strong Managers, Weak Owners: The Political Roots of American Corporate Finance. Princeton, N.J.: Princeton University Press.Google Scholar
  83. Rothbard, Murray N. 1970. Power and Market. Kansas City, Kans.: Sheed Andrews and McMeel.Google Scholar
  84. ————— [1962] 1993. Man, Economy, and State. Auburn, Ala.: Ludwig von Mises Institute.Google Scholar
  85. ————— 1998. The Ethics of Liberty. New York: New York University Press.Google Scholar
  86. Scharfstein, David. 1988. “The Disciplinary Role of Takeovers.” Review of Economic Studies 55(2): 185–99.CrossRefGoogle Scholar
  87. Scherer, F.M. 1988. “Corporate Takeovers: The Efficiency Arguments.” Journal of Economic Perspectives 2(1): 69–82.Google Scholar
  88. Schotland, Roy A. 1967. “Unsafe At Any Price: A Reply to Manne, Insider Trading and the Stock Market.” Virginia Law Review 53:1425–78.CrossRefGoogle Scholar
  89. Securities Act of 1933. 2001. Http:// Scholar
  90. Securities Exchange Act of 1934. 2001. Http:// Scholar
  91. Seyhun, H. Nejat. 1992. “The Effectiveness of the Insider Trading Sanctions.” Journal of Law and Economics 35:149–82.CrossRefGoogle Scholar
  92. —————. 1998. Investment Intelligence from Insider Trading. Cambridge, Mass.: MIT Press.Google Scholar
  93. Shankland, Stephen. 2001. “Linux Growth Underscores Threat to Microsoft.” News.Com. Http:// Scholar
  94. Shleifer, Andrei, and Robert W. Vishny. 1986. “Large Shareholders and Corporate Control.” Journal of Political Economy 94(3): 461–88.CrossRefGoogle Scholar
  95. —————. 1988. “Value Maximization and the Acquisition Process.” Journal of Economic Perspectives 2(1): 7–20.Google Scholar
  96. —————. 1997. “A Survey of Corporate Governance.” Journal of Finance 52(2): 737–83.CrossRefGoogle Scholar
  97. Schmidt, Klaus M. 1997. “Managerial Incentives and Product Market Competition.” Review of Economic Studies 64(2): 191–213.CrossRefGoogle Scholar
  98. Spiegel, Matthew, and Avanidhar Subrahmanyam. 1995. “The Efficacy of Insider Trading Regulation.” Working Paper 257. Berkeley: University of California, Institute of Business and Economic Research.Google Scholar
  99. Stiglitz, Joseph. 1993. Economics. New York: W.W. Norton.Google Scholar
  100. Strudler, Alan, and Eric W. Orts. 1999. “Moral Principle in Law of Insider Trading.” Texas Law Review 78:375–438.Google Scholar
  101. Uniform Commercial Code. 1992. Http:// Scholar
  102. United States v. Chiarella 445 U.S. 222. 1980. Http:// Scholar
  103. United States v. O’Hagan-U.S.-No. 96832. 1997. Http:// Scholar
  104. U.S. Congress. 1999. United States Code. Http:// Scholar
  105. U.S. Securities and Exchange Commission. 1999. Final Rule: Regulation of Takeovers and Security Holder Communications. Http:// Scholar
  106. Williamson, Oliver E. 1988. “Corporate Finance and Corporate Governance.” Journal of Finance 43(3): 567–91.CrossRefGoogle Scholar

Copyright information

© Springer 2001

Authors and Affiliations

  • Alexandre Padilla
    • 1
    • 2
  1. 1.the University of Law, Economics, and Science of Aix-MarseilleFrance
  2. 2.George Mason UniversityUSA

Personalised recommendations