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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