Koito Essay

toIllinois Law and Economics Working Papers Series Working Paper No. LE05-009 March, 2006

OUTSIDER TRADING AS AN INCENTIVE DEVICE
Larry E. Ribstein* Bruce H. Kobayashi**

*Richard W. and Marie L. Corman Professor, University of Illinois College of Law Associate Dean and Professor of Law, George Mason University School of Law

This paper can be downloaded without charge from the Social Science Research Network Electronic Paper Collection: http://papers.ssrn.com/pape.tar?abstract_id=700961

GEORGE MASON UNIVERSITY SCHOOL OF LAW

OUTSIDER TRADING AS AN INCENTIVE DEVICE
Larry E. Ribstein Bruce H. Kobayashi 06-16

GEORGE MASON UNIVERSITY LAW AND ECONOMICS RESEARCH PAPER SERIES
This paper can be downloaded without charge from the Social Science Research Network at http://ssrn.com/abstract_id=888188

OUTSIDER TRADING AS AN INCENTIVE DEVICE
Bruce H. Kobayashi & Larry E. Ribstein* March 2, 2006 Abstract Outsiders often have and seek to trade on material nonpublic information about firms. For example, lawyers have traded on advance information about the filing of a lawsuit, a social activist has announced a plan to trade on advance information of a boycott, and a hedge fund operator has engaged in a controversial trading maneuver in a control contest. Trading on nonpublic information is generally permitted if the information was not misappropriated or accompanied by fraud or manipulation or other misconduct. However, recent public focus on the above transactions signals possible regulation in some specific outsider trading situations. More generally, Ayres and Choi propose giving firms broad rights to decide whether outsider trading in their stocks will be regulated. We argue against broad regulation on the basis that outsider trading can provide incentives for socially beneficial conduct. In particular, outsider trading provides an important way to capitalize on investments in intellectual property that are not otherwise protected by the intellectual...