Information(De-)Regulation of Capital Markets from the Viewpoint of New Institutional Economics

Laws against insider trading, disclosure requirements, and auditing rules form the basis for information regulation of capital markets. Although the economic effects of insider dealing are mixed, institutional economics favors a prohibition of insider trading to minimize the negative effects. Private regulation of insider trading will fail because of weak disciplinary mechanisms. To prevent overregulation, however, corporations should have the right to opt out of the general ban on insider trading. The impairment of information efficiency by laws against insider trading must not automatically be countered by public disclosure and auditing rules. It is efficient to install competition among public and private disclosure and auditing standards.