Effects of Insider Trading: Analysis, Should It Be Legalized

Insider trading is the basing of stock trades in a public company on information that is not known by the public (Rasmussen, 2009). Whether an individual makes trades in this manner or just tips off another trader to the information, it is considered insider trading (Rasmussen, 2009). Insider trading is illegal because it "destroys [the] level playing field" that allows all investors to make decisions based on the same information (Rasmussen, 2009). However, under some conditions insider trading is legal, as when a company's corporate insiders buy and sell their own company's stock and report their trades to the U.S. Securities and Exchange Commission, the SEC (Rasmussen, 2009). This approach is legal because the insider trading is done out in the open where anyone can learn the corporate insider's opinion of his company (Rasmussen, 2009).

This paper will examine the practice of insider trading asserting that it should be legalized. It will also explain how it relates to and affects the economy.

Utilitarian ethics judges actions by their outcomes, and from this perspective, "buyers are no worse off as a result of having purchased from an insider than they would have been if they had purchased from a noninsider" (McGee, 2008, p. 59). From this theoretical perspective, at least, there is therefore nothing wrong with insider trading.

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idual "would not be accused of reaping unjust profits, even if the identical stock was purchased for the same price the insider would have paid" (McGee, 2008, p. 58). Its beneficial effects include the fact that it serves to communicate market information, thus making markets more efficient (McGee, 2008, p. 59). By watching what insiders do, investors can pattern their investments likewise, moving the company's stock price closer to its true value (McGee, 2008, p. 59). Prohibiting insider trading blocks this vital flow of information, causing insiders to block their trades or avoid making them at all and depriving the public of this insider information (McGee, 2008, p. 59). Outlawing insider trading, on the other hand, "may have long-term adverse effects on the economy" (McGee, 2008, p. 61). Since insider trading improves market efficiency, one of the first effects of outlawing insider trading is a less efficient market (McGee, 2008, p. 61). According to Jarrell et al. (1988, as cited in McGee, 2008, p. 61), "Hostile takeovers will be more difficult to make, so shareholders will lose, since shareholders tend to benefit by hostile takeovers." Insider trading laws also result in "compliance and escape

Category: Misc - E