Rules against insider trading also boost innovation, research finds
Strong of doesn't just protect investors—it encourages businesses to be more innovative, according to .
In fact, we found that after a company is hit with an insider-trading indictment, it generally produces more patents—which in turn are cited more by other patents—than it did before the indictment. It's also likely to outperform other companies—at least in terms of innovative activities and operating performance—that haven't faced any such charges.
Wait—what is insider trading?
is when a director or employee of a company trades their public stock or another security based on important or "material" information about that business. While people often wrongly think all insider trading is against the law, it's actually legal for insiders based on information that's also available to the public. What's illegal is trading based on "nonpublic," or secret, information.
The idea is that in a fair and transparent market, all investors should have access to the same information. But while are intended to help investors, a suggests they may also help foster innovation within businesses, which is a of .
Our new work, spanning from 1993 to 2017, backs that up. Specifically, we found that of by the U.S. Securities and Exchange Commission results in enhanced investor protection, improved operating efficiency and greater innovation as measured by patent grants and citations.
An indictment-to-innovation pipeline?
It's reasonable to ask: Why would enforcing insider trading restrictions affect innovation?
We think the increased protection they offer against rent-seeking—which is when corporate insiders —contributes to greater trust among investors, encouraging more investment, and boosts profitability. With a more stable and trusting investor base, companies are better capitalized. As a result, they're better positioned to direct resources toward research and development initiatives and other innovative projects. That can lead to the discovery of new and improved technologies, resulting in more patents, which create incentives for more innovation by protecting inventions.
We observe that companies operating under stringent insider trading restrictions are able to prioritize growth and innovation, due to outside investors valuing the protections and trusting the firm's leadership. Managers, aware of increased oversight, prioritize maintaining investor trust, which can facilitate long-term investments. Our study also highlights that firms with strict insider trading policies tend to have lower costs when raising equity.
Why lawmakers and businesses should care
For policymakers, these findings show the value of robustly enforcing insider trading laws. Using them to ensure a fair and transparent market not only protects investors; it also fosters long-term investment and innovation.
And for businesses, understanding the benefits of these restrictions can lead to more strategic decisions that prioritize long-term growth and innovation. While most insider trading is legal, healthy restrictions on the practice remain valuable for firms and investors.
More broadly, this study shows why it's important to weigh the benefits of and consider how they can strengthen markets. This is particularly important given how complex modern financial markets are. We think there's wisdom in taking a that goes beyond just generating returns for investors, emphasizing the need to support .
Provided by The Conversation
This article is republished from under a Creative Commons license. Read the .
