Abstract

"Finding Empirical Measures of Market Confidence Using Goodwin v. Agassiz"

Kevin R. Douglas, Michigan State University (kevin.douglas@law.msu.edu)

The “market confidence” rationale for securities regulation began with Franklin D. Roosevelt’s defense of mandatory disclosure laws under the Securities Act of 1933. In the 1980s, scholars and Securities and Exchange Commission (SEC) officials began using the same rationale to defend the prohibition on insider trading. Many officials and scholars describe the prohibition and other trading restrictions as necessary to “make investors more willing to commit their capital.” In this paper, we evaluate the market response to a state supreme court declaring insider trading legal several decades before the practice was first penalized by the SEC. According to the market confidence rationale, evidence of insider trading should have lowered the demand for the securities issued by the companies run by the defendants in this case. On the contrary, our preliminary results show a positive but statistically insignificant increase in demand (price and volume) for our target company’s stock in response to the Massachusetts Supreme Court declaring insider trading legal. The results also show an almost non-response to a Massachusetts appellate court’s earlier decision to dismiss the case. Despite dramatic changes in the character of “ordinary investors” between 1933 and today, these results suggest that the market confidence rationale for insider trading relies on ineffective assumptions about human behavior.