26 Conn. L. Rev. 1 (1993-1994)
Insider Trading as a Transactional Cost: A Market Micostructure Justification and Optimization of Insider Trading Regulation

handle is hein.journals/conlr26 and id is 19 raw text is: CONNECTICUT
LAW REVIEW

VOLUME 26              FALL 1993             NUMBER 1

INSIDER TRADING AS A TRANSACTIONAL
COST: A MARKET MICROSTRUCTURE
JUSTIFICATION AND OPTIMIZATION OF
INSIDER TRADING REGULATION
Nicholas L. Georgakopoulos
ABSTRACT: This Article offers a direct justification for the regulation of
insider trading from an economic perspective using the recently devel-
oped financial methodology of market microstructure. Insider trading
should be understood as a category of informed trading. Informed trad-
ing is, generally, desirable because it promotes efficient pricing. Howev-
er, lack of competition with other informed traders may allow small
groups of informed traders to extract more profits than a competitive
group of informed traders without influencing prices as much. The
* Associate Professor of Law, University of Connecticut School of Law; SJ.D.. 1992, Har-
yard University; L.L.M., 1988. Harvard University. I am deeply indebted to Professor Riier
Kraakman for his invaluable advice, teaching, and support. This Article draws from the second
chapter of the author's doctoral dissertation. A General Theory of Securities Regulation: An
Economic Analysis of Securities Fraud, Insider Trading and Corporate Disclosure (1991) (unpub-
lished doctoral dissertation, Harvard Law School). The comments of Howell Jackson, Louis
Kaplow, Lucian Bebchuck, Christine Jolls, and William Klein (from the law and economics per-
spective); the comments of George Constantinides, Ken Froot, Kathleen Hagerty, Bob Merton.
Andrd Perold, .Paul Pfleiderer, Lisa Muelbroek, and Eric Sirri (from the perspective of finance);
and the comments of the participants in the faculty seminars of George Mlaon and University
of Connecticut Law Schools and the SJ.D. Colloquium at Harvard Law School are gratefully
acknowledged.

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