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Review of Finance Advance Access published online on May 6, 2008
Review of Finance, doi:10.1093/rof/rfn009
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© The Author 2008. Published by Oxford University Press on behalf of the European Finance Association. All right reserved. For Permissions, please email: journals.permissions@oxfordjournals.org

Should Insider Trading be Prohibited when Share Repurchases are Allowed?*

Andrea M. Buffa1 and Giovanna Nicodano2

1 London Business School
2 Università degli Studi di Torino and Collegio Carlo Alberto.

This paper considers share repurchases as the way long-term shareholders preserve their ability to use corporate information for speculative purposes when insider trading regulation is enforced. This use of corporate information increases the adverse selection losses of short-term shareholders. Thus, buy-back programs reduce their incentive to invest in stocks that back the most productive technology, leading to a socially inefficient equilibrium. It follows that insider trading should not be banned when share repurchases are allowed. More generally, the paper argues that the regulation of insider trading and repurchases can not be considered in isolation, and analyzes their interplay.

Key Words: G18 • G14 • D82 • K22

* We got useful comments and suggestions from the Editor, Josef Zechner, an anonymous referee, Larry Glosten, Paolo Bertoletti, Sudipto Bhattacharya, Arnoud Boot, Riccardo Calcagno, Giovanni Cespa, Michael Fishman, Edith Ginglinger, Henry Hultquist, Hayne Leland, Stefano Lovo, Henry Manne, Jannine Poletti-Hughes, Francesco Sangiorgi and seminar participants at Bocconi, IGIER, Società Italiana degli Economisti, SET Conference, Studienzentrum Gerzensee, Venice Workshop in Quantitative Finance, EFMA Symposium on Corporate Governance and Collegio Carlo Alberto. The usual disclaimer applies.


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