The Regulation of Insider Trading
Imagine two firms, A and B, which are identical in all respects except that, in its charter, firm A prohibits the trading of its shares based on inside (nonpublic) information. The firm requires insiders (employees) to report their trades, which a special committee or an independent accounting firm then checks to ensure compliance with the charter provision. Firm B, by contrast, neither prohibits insider trading nor requires reporting. Insiders openly trade shares of firm B and regularly earn positive abnormal returns. In competitive capital markets, which charter provision will survive? Despite the deceptive simplicity of this question, it has no obvious answer.' The consensus, to the extent that any exists, appears to be that firm A's charter will survive because it eliminates various per-