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Insider Trading: Hayek, Virtual Markets, and the Dog that Did Not Bark

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  • Henry G. Manne

Abstract

This Essay briefly reexamines the great debates on the role of insider trading in the corporate system from the perspectives of efficiency of capital markets, harm to individual investors, and executive compensation. The focus is on the mystery of why trading by all kinds of insiders as well as knowledgeable outsiders was studiously ignored by the business and investment communities before the advent of insider trading regulation. It is hardly conceivable that officers, directors, and controlling shareholders would have remained totally silent in the face of widespread insider trading if they had seen the practice as being harmful to the company, to themselves, or to investors. By analogy with the famous article by Friedrich Hayek, The Use of Knowledge in Society, this Essay considers the problem of obtaining necessary information for managers of large corporate enterprises. The suggested analytical framework views the share price, sensitively impacted by informed trading, as a mechanism for timely transmission of valuable information to top managers and large shareholders. Informed trading in the stock market is also compared to “prediction” or “virtual” markets currently used by corporations and policymakers.

Suggested Citation

  • Henry G. Manne, 2005. "Insider Trading: Hayek, Virtual Markets, and the Dog that Did Not Bark," ICER Working Papers 07-2005, ICER - International Centre for Economic Research.
    • Handle: RePEc:icr:wpicer:07-2005
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    File URL: http://www.bemservizi.unito.it/repec/icr/wp2005/ICERwp7-05.pdf
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    Cited by:

    1. James J. Angel & Douglas M. McCabe, 2018. "Insider Trading 2.0? The Ethics of Information Sales," Journal of Business Ethics, Springer, vol. 147(4), pages 747-760, February.
    2. Esther B. Brio & Ilidio Lopes-e-Silva & Javier Perote, 2016. "Effects of opportunistic behaviors on security markets: an experimental approach to insider trading and earnings management," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 33(3), pages 379-402, December.
    3. Bruce W. Klaw & Don Mayer, 2021. "Ethics, Markets, and the Legalization of Insider Trading," Journal of Business Ethics, Springer, vol. 168(1), pages 55-70, January.
    4. Mushtaq Hussain Khan, & Ahmad Fraz & Arshad Hassan, 2016. "The Diversification Puzzle: The Role of Asymmetric Information and Insider Trading in Pakistan," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 21(2), pages 97-119, July-Dec.
    5. Brenner, Steffen, 2011. "On the irrelevance of insider trading for managerial compensation," European Economic Review, Elsevier, vol. 55(2), pages 293-303, February.
    6. Sander De Groote & Liesbeth Bruynseels & Ann Gaeremynck, 2023. "Are All Directors Treated Equally? Evidence from Director Turnover Following Opportunistic Insider Selling," Journal of Business Ethics, Springer, vol. 185(1), pages 185-207, June.
    7. Alex Frino & Stephen Satchell & Brad Wong & Hui Zheng, 2013. "How much does an Illegal Insider Trade?," International Review of Finance, International Review of Finance Ltd., vol. 13(2), pages 241-263, June.
    8. Sadok El Ghoul & Omrane Guedhami & Robert Nash & He (Helen) Wang, 2022. "Economic policy uncertainty and insider trading," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 45(4), pages 817-854, December.
    9. Caspar Rose & Nicolai Søpstad, 2015. "Reactions to corporate insider’s transactions: Do legal stock market disclosure rules have an impact?," European Journal of Law and Economics, Springer, vol. 40(2), pages 247-272, October.

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