Insider Trading Regulations: Effective or Defective?

The purpose of this study is to examine the effectiveness of current regulations of insider trading. In the past, examinations of regulatory effectiveness have been solely concerned with analyses of the . excess returns earned by insiders from their trading actiovities in the stock market. This study, however, involves a more direct approach to the problem. It is assumed that for regulations to be effective, two conditions must be satisfied. First, they must be stated in a manner which prohibits all types of behavior which would be considered harmful. Second, the regulations must be enforced to the point where the marginal enforcement costs are no greater than the marginal loss from more insider trading. It is the thesis of this paper that current regulations of insider trading are neither accurately stated nor adeguately enforced thereby enabling insiders to reap excess returns from their tradirg activities in the stock and options markets