The Efficiency of Insider Trading Deterrence

This article analyzes the repression of insider trading within the framework of deterrence theory (Polinsky and Shavell, 2007). The paper first considers the justification of the deterrence of insider trading, and then questions the modalities of deterrence. It contributes to the debate on the respective effectiveness of the deterrence of insider trading by an administrative authority or a criminal court. In addition, the article questions the impact of increasing the publicity on sanctions by the administrative authority. Communication can: reinforce deterrence by stigmatizing, inform market actors, and modify beliefs about the harmfulness of insider trading. However, stigma is a tool to be live handled with caution, due to: the underlying costs in terms of disutility of the stigma, the random nature of this cost, the rise in recidivism's probability and the negative effect on the reliability of information conveyed by sanctions when the standard of proof is weak (as it is generally the case for administrative authorities).