Ethics of Insider Trading « The Business Ethics Blog

The fiduciary responsibility argument against insider trading is quite strong.

Pro-arguments focus on the increased information efficiency that should arise. Intuitively, information efficiency will increase, but Pareto efficiency will decrease depending upon how quickly the information is incorporated for everyone to act upon. Do most proponents for legal insider trading assume the informational efficiency is the better good because the process is  instantaneous enough to get us closest to the desired Pareto efficiency? What about Insider Trading that seeks to disguise what is happening and preventing the inside information from being incorporated into price?

If legal insider trading produces greater informational efficiency without moving too far away from a Pareto-optimal allocation, then it is maybe justifiable. However, I am skeptical. Human nature is a major hurdle. Between the potential abuse and behavioral biases, the informational efficiency will not be achieved fast enough. Who has the burden of proof for this view, the pro or con camp?

on the ethics of insider trading is by Jennifer Moore, and is called “What Is Really Unethical About Insider Trading?”* Moore looks at a number of arguments against insider trading — arguments rooted in fairness, in property rights, and in the risk of harm to investors — and finds most of them lacking. Moore ends up arguing — plausibly, in my view — that the real reason insider trading is unethical is that it jeopardizes the fiduciary relationships that are central to business. If insider trading were permitted, that would put corporate insiders in a conflict of interest. Basically, the interests of corporate insiders would stop being well-aligned with the interests of the shareholders they are supposed to serve. And if the interests of corporate insiders aren’t aligned with the interests of shareholders, then people are much less likely to be willing to buy shares (i.e., to invest) in companies. And that wouldn’t be good for the firm, for its shareholders, or for society in general.

via Ethics of Insider Trading « The Business Ethics Blog.

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