How does insider trading affect society

There is debate as to whether these particular actions constitute illegal or unethical activity; [li] given such circumstances, it is difficult to determine the ethical implications of justice.

As previously mentioned, insider trading is a violation of distributive justice in relation to the right of equal information for all traders. According to the theory of John Rawls, traders should avoid engaging in insider trading in order to protect their own interests as well as the interests of others. Since the stock market is becoming an increasingly international entity, inside traders need to consider the consequences of their actions, because more often than not, they will also be subject to the decisions of others.

When considering ethical decision-making using a theory of justice, the ends do not justify the means no matter how large or small the affected parties. This is a very significant concept to consider, although several different theories, philosophies. A merger usually entails an exchange of stock. Mergers add value only if the two companies are worth more together than apart. University of Kansas Libraries. Business Source Premier. Boatright ed. The University of Kansas Libraries.

Trevino and Katherine A. The University of Kansas. Boatright, John R. Sept 22, C1. Fugazy, Danielle. Halah, Touryalai. October 13, Kolb, Robert W.

Spring Rachels, Stuart and James Rachels. The Elements of Moral Philosophy. Shefrin, Hersh and Meir Statman. Singer, Peter. A Companion to Ethics. Statman, Meir. Trevino, Linda K.

Zweig, Jason. Barring investors from readily receiving information or getting that information indirectly through price movements can lead to errors.

They might buy or sell a stock that they otherwise would not have traded if the information had been available earlier. Laws against insider trading, especially when vigorously enforced, can result in innocent people going to prison. As rules become more complex, it becomes harder to know what is or is not legal resulting in participants accidentally breaking the law without knowing so.

For example, someone with access to material nonpublic information might accidentally disclose it to a visiting relative while talking over the phone. If the relative acts on that information and gets caught, the person who accidentally disclosed it might also go to prison.

These sorts of risks increase fear to the point where talented people pursue careers elsewhere. If you happen to get material nonpublic information, do not make any investment decisions based on it until that information becomes public. Also, never share material nonpublic information with outsiders. Yet another argument for allowing insider trading is that it is not serious enough to be worth prosecuting. The government must spend its limited resources on catching nonviolent traders to enforce laws against insider trading.

There is an opportunity cost to going after insider trading because the government must divert those resources from cases of outright theft, violent assaults, and even murder. One argument against insider trading is that if a select few people trade on material nonpublic information, then the public might perceive markets as unfair.

That could undermine confidence in the financial system and retail investors will not want to participate in rigged markets. Insiders with nonpublic information would be able to avoid losses and benefit from gains. That effectively eliminates the inherent risk that investors without the undisclosed information take on by investing. As the public gives up on markets, firms would have more difficulty raising funds.

Eventually, there might be few outsiders left. At that point, insider trading could eliminate itself. Another argument against insider trading is that it robs the investors without nonpublic information of receiving the full value for their securities. If nonpublic information became widely known before insider trading occurred, the markets would integrate that information, resulting in accurately priced securities.

Suppose a pharmaceutical company has success in Phase 3 trials for a new vaccine and will make that information public in a week. Then, there is an opportunity for an investor with that nonpublic information to exploit it. Why play in system rigged against you? One argument thrown up as a defence for insider trading is that if the insiders bring information to the market sooner , then prices will be more efficiently priced.

There is little empirical evidence to indicate this works in reality. Stock price efficiency is based on what is known about a company. Recent research on this topic in the U.

Strict regulation deters illegal insider trading with minimal adverse impact on this price discovery process. The unscrupulous will continue to pursue ways to counter regulations. View all. Testimonial Client Testimonial - Peggy A.

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