UCLA School of Law

Insider trading attracts unique attention in corporate and securities law, but despite the salience of the practice, there is limited empirical evidence on whether the law is effective at preventing it, and particularly whether the adoption of the main doctrine that forms the basis of the insider trading prohibition today – the doctrine of the “misappropriation theory” – had a meaningful deterrent effect. This paper examines this question by studying the impact of the Supreme Court’s decision in O’Hagan, which adopted the misappropriation theory, on target run-ups in mergers and acquisitions (a common proxy for insider trading). The data show that run-ups decreased significantly and immediately in relation to announcement returns after O’Hagan, which suggests that the misappropriation theory in fact deterred insider trading.