Legalizing Insider Trading – recent arguments

An earlier post on this blog had looked at some theoretical arguments about whether insider trading should be banned at all. Generally, as the post noted, allowing insider trading does seem “outlandish”. Nonetheless, newer arguments against the prohibition on insider trading do continue to appear in academic works. Of course, these works are not specific to the Indian context, but are rather general in nature.

For instance, an abstract of an article by Professor Robert McGee published in the Journal of Business Ethics (Volume 77, issue 2, 2008) says:

Insider trading has received a bad name in recent decades. The popular press makes it sound like an evil practice where those who engage in it are totally devoid of ethical principles. Yet not all insider trading is unethical and some studies have concluded that certain kinds of insider trading are actually beneficial to the greater investment community. Some scholars in philosophy, law and economics have disputed whether insider trading should be punished at all while others assert that it should be illegal in all cases. This paper explores the nature of insider trading and analyzes the issues to determine the positive and negative aspects of insider trading, and how policy should be changed. The best hope would be for studies to be made that isolate the individuals or groups who are fraudulently harmed by insider trading. If any such groups exist, then clearly worded legislation could be passed to prevent any fraud from being committed against these individuals and groups, while allowing non-fraudulent transactions to be completed without fear of prosecution. Until it can be clearly determined that someone is fraudulently harmed by insider trading, there should be no law or regulation restricting the practice, since such restrictions violate individual rights and will likely have a negative market reaction.

The article is available here.

Another article published in the Review of Finance (May 2008) seeks to draw a linkage between share repurchases and insider trading. It argues that wherever share repurchases are allowed, insider trading should also be allowed as a logical corollary. The reasoning is evident from the abstract, which states “This paper considers share repurchases as the way long-term shareholders preserve their ability to use corporate information for speculative purposes when insider trading regulation is enforced. This use of corporate information increases the adverse selection losses of short-term shareholders. Thus, buy-back programs reduce their incentive to invest in stocks that back the most productive technology, leading to a socially inefficient equilibrium. It follows that insider trading should not be banned when share repurchases are allowed. More generally, the paper argues that the regulation of insider trading and repurchases can not be considered in isolation, and analyzes their interplay.

The article can be accessed here.

These arguments make for interesting reading; nonetheless there appears to be a long way to go before most legal systems are convinced by them.

About the author

Mihir Naniwadekar

Add comment

Top Posts & Pages


Recent Comments


web analytics

Social Media