Why Regulate Insider Trading? Evidence from the First Great Merger Wave (1897-1903)

We use event-time methodology to study legal insider trading associated with mergers circa 1900. For mergers with quot;prospectivequot; disclosures similar to today's, we find substantial value gains at announcement, implying participation by quot;outsidequot; shareholders despite the absence of insider constraints. Furthermore, preannouncement stock-price runups, relative to total value gain, are no more than those observed for modern mergers. Insider regulation apparently has produced little benefit for outsiders, with the inside information-pricing function and related gains shifting to external quot;information specialists.quot; Other results suggest market penalties for nondisclosure; i.e., insider trading is less successful in a restricted information environment