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  3. American Economic Review
  4. December 2001
  5. Why Regulate Insider Trading? Evidence from the First Great Merger Wave (1897-1903)

Why Regulate Insider Trading? Evidence from the First Great Merger Wave (1897-1903)

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Abstract

We use event-time methodology to study legal insider trading associated with mergers circa 1900. For mergers with "prospective" disclosures similar to today's, we find substantial value gains at announcement, implying participation by "outside" shareholders despite the absence of insider constraints. Furthermore, preannouncement stock-price runups, relative to total value gain, are no more than those observed for modern mergers. Insider regulation apparently has produced little benefit for outsiders, with the inside information-pricing function and related gains shifting to external "information specialists." Other results suggest market penalties for nondisclosure; i.e., insider trading is less successful in a restricted information environment.

Citation

Banerjee, Ajeyo, and E. Woodrow Eckard. 2001. "Why Regulate Insider Trading? Evidence from the First Great Merger Wave (1897-1903)." American Economic Review, 91 (5): 1329-1349. DOI: 10.1257/aer.91.5.1329

JEL Classification

  • G18 General Financial Markets: Government Policy and Regulation
  • N21 Economic History: Financial Markets and Institutions: U.S.; Canada: Pre-1913
  • G34 Mergers; Acquisitions; Restructuring; Voting; Proxy Contests; Corporate Governance
  • N81 Micro-Business History: U.S.; Canada: Pre-1913