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An ethical analysis of regulating insider trading

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Author Info

  • P.J. Engelen
  • Luc van Liedekerke

Abstract

Although there seems to be a broad consensus to prohibit insider trading among supervising authorities and market professionals, the debate on insider trading has not settled definitively. We introduce a distinction between insider trading and market manipulation on the one hand and corporate insiders versus misappropriators on the other hand. This gives rise to four types of alleged wrong transactions. Using a utilitarian and a non-utilitarian fairness approach, we demonstrate that it is hard to find good arguments against insider trading in its purest form (type I transactions). Using a property rights perspective in particular, we show that neither a general ban nor a general permitting of insider trading is an efficient outcome. We propose a solution in which companies solve this compensation problem contractually with their corporate agents. In this way,insider trading can be used as a governance instrument which can reinforce the fiduciary relationship.

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File URL: http://dspace.library.uu.nl/bitstream/handle/1874/37099/06-05.pdf
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Bibliographic Info

Paper provided by Utrecht School of Economics in its series Working Papers with number 06-05.

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Length: 21 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:use:tkiwps:0605

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Related research

Keywords: insider trading; market manipulation; fairness; property rights;

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References

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  1. Ross Levine, 1997. "Financial Development and Economic Growth: Views and Agenda," Journal of Economic Literature, American Economic Association, vol. 35(2), pages 688-726, June.
  2. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November.
  3. Grossman, Sanford J, 1986. "An Analysis of the Role of "Insider Trading" on Futures Markets," The Journal of Business, University of Chicago Press, vol. 59(2), pages S129-46, April.
  4. Tighe, Carla & Michener, Ron, 1994. "The Political Economy of Insider-Trading Laws," American Economic Review, American Economic Association, vol. 84(2), pages 164-68, May.
  5. Hu, Jie & Noe, Thomas H., 2001. "Insider trading and managerial incentives," Journal of Banking & Finance, Elsevier, vol. 25(4), pages 681-716, April.
  6. Cornell, Bradford & Sirri, Erik R, 1992. " The Reaction of Investors and Stock Prices to Insider Trading," Journal of Finance, American Finance Association, vol. 47(3), pages 1031-59, July.
  7. Haddock, David D & Macey, Jonathan R, 1987. "Regulation on Demand: A Private Interest Model, with an Application to Insider Trading Regulation," Journal of Law and Economics, University of Chicago Press, vol. 30(2), pages 311-52, October.
  8. Meulbroek, Lisa K, 1992. " An Empirical Analysis of Illegal Insider Trading," Journal of Finance, American Finance Association, vol. 47(5), pages 1661-99, December.
  9. Holden, Craig W & Subrahmanyam, Avanidhar, 1992. " Long-Lived Private Information and Imperfect Competition," Journal of Finance, American Finance Association, vol. 47(1), pages 247-70, March.
  10. Sugato Chakravarty & John J. McConnell, 1997. "An Analysis of Prices, Bid/Ask Spreads, and Bid and Ask Depths Surrounding Ivan Boesky's Illegal Trading in Carnation's Stock," Financial Management, Financial Management Association, vol. 26(2), Summer.
  11. Noe, Thomas H, 1997. "Insider Trading and the Problem of Corporate Agency," Journal of Law, Economics and Organization, Oxford University Press, vol. 13(2), pages 287-318, October.
  12. Guochang Zhang, 2001. "Regulated Managerial Insider Trading as a Mechanism to Facilitate Shareholder Control," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 28(1-2), pages 35-62.
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Cited by:
  1. Robert McGee, 2008. "Applying Ethics to Insider Trading," Journal of Business Ethics, Springer, vol. 77(2), pages 205-217, January.

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