Berkeley Law

It has long been conventional wisdom that insider's use of inside information to abstain from trading raises the same types of policy concerns as insider trading. This widely held perception has dominated much of the debate over the regulation of insider trading. I show that this view is flatly incorrect. The paper demonstrates that, as long as insiders cannot trade while in possession of inside information, insiders' ability to use inside information to abstain from trading does not make them better off than public shareholders. The paper then explains why insider abstention cannot give rise to the same type of economic distortions that might be associated with insider trading. I also analyze the implications of my findings for a number of issues in insider regulation.