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64 Wash. U. L. Q. 475 (1986)
Insider Trading Regulation and the Production of Information: Theory and Evidence

handle is hein.journals/walq64 and id is 485 raw text is: INSIDER TRADING REGULATION AND THE PRODUCTION OF INFORMATION: THEORY AND EVIDENCE JAMES D. COX* The traditional view of managers who formulate disclosure policy for publicly traded corporations is currently embodied in the mandatory dis- closure rules of the federal securities laws: periodic reporting require- ments are mandated because managers lack sufficient incentives to disclose trustworthy, confidential corporate information.1 Further un- derscoring the necessity of mandatory disclosure rules is the widely held fear that managers will disclose material information only after they have exploited its values for their private gain. Thus the necessity to assure that insiders do not selfishly appropriate the advantage of their natural monopoly over corporate information partially justifies the disclosure rules.- The major rejoinder to the traditional view is the free market ap- proach, which counsels that wealth maximizing managers will release in- formation up to the point that the marginal benefits of disclosure equal the marginal costs.3 The free market view assumes that managers will * Professor of Law, Duke University. The author is grateful for the support of the E.T. Bost Research Professorship during the preparation of this Article. I Manipulation through delay and nonstandardized reporting practices are emphasized in the legislative reports accompanying the enacting of the periodic reporting provisions mandated in the Securities Exchange Act of 1934. See H.R. REP. No. 1383, 73d Cong., 2d Sess. 5, 11-12 (1934); S. REP. No. 792, 73d Cong., 2d Sess. (1934). An excellent description of the many abuses prompting the enactment of the federal securities laws appears in J. SELIGMAN, THE TRANSFORMATION OF WALL STREET: A HISTORY OF THE SECURITIES EXCHANGE COMMISSION AND MODERN CORPO- RATE FINANCE 1-72 (1982). Professor Seligman also has compiled the most comprehensive exami- nation of the arguments in support of mandatory corporate disclosure. See Seligman, The Historical Need For a Mandatory Disclosure System, 9 J. CORP. L. 1 (1983). 2. This is frequently a justification for prohibiting insider trading. See e.g., Schotland, Unsafe at Any Price: A Reply to Manne, Insider Trading and the Stock Market, 53 VA. L. REV. 1425, 1448- 49 (1967); Scott, Insider Trading: Rule lO-b, Disclosure and Corporate Privacy, 9 J. LEG. STUD. 801, 810-11 (1980). 3. If one were to take account only to the volume of scholarship advocating this view, mandatory disclosure would appear to have a very attenuated future. See, eg., H. MANNE & E. SOLOMON, WALL STREET IN TRANSITION: THE EMERGING SYSTEM AND ITS IMPACT ON THE ECONOMY (1974); S. Ross, DISCLOSURE REGULATION IN FINANCIAL MARKETS: IMPLICATIONS OF MODERN FINANCE THEORY AND SIGNALING THEORY IN ISSUES IN FINANCIAL REGULATION 177 (Edwards ed. 1979); Easterbrook & Fischel, Mandatory Disclosure And The Protection oflnves-

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