Using Property Rights and Fairness to Argue Against Insider TradingHenry G. Manne in Insider Trading and Property Rights in NewInformation argues no shareholder is injured by insider trading. Rather, the shares will increase in value as the price is pushed in the correct direction, dictated by the facts of the company, using valid information the trader has obtained. An increasing stock price will increase the number of buyers in the market, sustaining or increasing the price further. He believes the "fairness" issue is misplaced as a reason to regulate the practice. Insider trading not only means selling a stock, but also not selling it at a given time. Those not selling are not prosecuted even though they may be using the same information as sellers. Manne claims since the SEC didn't outlaw the practice until the 1960's, insider trading was not considered a threat to the markets, and regulation reduces incentive to produce new information.
Stephen Bainbridge, in his Regulate Insider Trading essay in Capitalism Magazine believes property rights to information is more efficiently placed in the corporation than in the individual. The individual must sell the stock in order to profit. When other buyers enter the market, the price could decrease, prohibiting the trader from ever recouping his costs he incurred in securing the information originally. The corporation uses the ownership of the information to maximize its incentive to produce a socially valuable product. Bainbridge believes government regulation is necessary to "level the playing field" by maximizing information available to all investors. Otherwise, investor confidence in stocks will be undermined, and investments will flee the market for elsewhere.
REFERENCESStephen Bainbridge, Regulate Insider Trading essay in Capitalism Magazine. Retrieved from the Internet February 2, 2007.
Henry G. Manne, Insider Trading and Property Rights in New InformationThe...