Quarterly Journal of Austrian Economics

Can Agency Theory Justify the Regulation of Insider Trading?

The Quarterly Journal of Austrian Economics
Downloads
 

Volume 5, No. 1 (Spring 2002)

 

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.

 

CITE THIS ARTICLE

Padilla, Alexandre. “Can Agency Theory Justify the Regulation of Insider Trading?” The Quarterly Journal of Austrian Economics 5, No. 1 (Spring 2002) 3–38.

All Rights Reserved ©
What is the Mises Institute?

The Mises Institute is a non-profit organization that exists to promote teaching and research in the Austrian School of economics, individual freedom, honest history, and international peace, in the tradition of Ludwig von Mises and Murray N. Rothbard. 

Non-political, non-partisan, and non-PC, we advocate a radical shift in the intellectual climate, away from statism and toward a private property order. We believe that our foundational ideas are of permanent value, and oppose all efforts at compromise, sellout, and amalgamation of these ideas with fashionable political, cultural, and social doctrines inimical to their spirit.

Become a Member
Mises Institute