Insider Trading Rules Lead to Increased Innovation, Study Shows
Strong enforcement of insider trading laws isn’t just about protecting investors – it also promotes innovation, as suggested by recent research. A study conducted by D. Brian Blank from Mississippi State University, Jiawei Chen from the University of West Alabama, and Valeriya Posylnaya from the University of Minnesota Duluth revealed that companies tend to become more innovative following insider trading indictments. This increase in innovation is often reflected in the form of more patents generated by these companies, which are subsequently cited more frequently by other patents. Moreover, companies that have faced insider trading charges tend to outperform those that haven’t in terms of innovative activities and operational performance.
For those unclear on what insider trading entails, it is when a company’s director or employee trades their publicly-traded stock or another security based on significant nonpublic information about the business. While not all instances of insider trading are illegal – it is allowed if the information is public – trading on secret information is considered illegal. The restrictions against insider trading aim to create a fair and transparent market where all investors have equal access to information.
Enforcing insider trading laws is believed to discourage unfair practices and enhance trust among investors which, in turn, leads to more investment and profitability. This bolstered trust allows companies to secure greater resources for research and development initiatives and other innovative projects. The resulting patents protect inventions and provide incentives for further innovation, ultimately driving economic growth.
The study conducted by Blank, Chen, and Posylnaya from 1993 to 2017 found that stringent enforcement of insider trading regulations by the U.S. Securities and Exchange Commission correlates with better investor protection, improved operational efficiency, and increased innovation in the form of patent grants and citations. By prioritizing long-term growth and innovation, companies operating under stringent insider trading restrictions tend to earn greater trust from outside investors, lower equity-raising costs, and foster a culture of innovation.
Policymakers should pay attention to the benefits of robustly enforcing insider trading laws as it not only safeguards investors but also stimulates long-term investment and innovation. Business leaders, on the other hand, can leverage an understanding of the advantages of these regulations to make strategic decisions that promote long-term growth and innovation. Understanding the value of healthy restrictions on insider trading can contribute to fostering a culture of innovation within firms and benefiting investors in the long run.
