Question

“How do you think the stock market would be affected if the laws were changed so that trading on insider information was no longer illegal? What would be the impact on the goal of the financial manager if such a change were to occur?”

Answer 1

IF INSIDER TRADING WILL BE LEGAL , IT WILL BE A DISASTER

A persistent band of commentators continues to claim that insider trading is beneficial or, at least, so innocuous that it should be legal. However, these arguments all presume that the level of insider trading would remain low even if it were permitted, because it would be limited by the personal wealth of individual insiders. This Note has shown that this assumption is unwarranted.

If insider trading were legal, insiders could easily obtain outside financing to exploit their informational advantage, and they would have no reason not to do so. This would drive the disadvantaged outsiders from the stock markets, thereby drastically reducing public ownership of corporations, which would also effectively end insider trading. Individual corporations lack the means and the incentives to curb insider trading on their own. It would also be unwise to treat inside information as property belonging to the corporation that can be exploited in trading for its own account. Corporations are supposed to operate for the benefit of their shareholders, not to fleece them for the benefit of some other constituency or some subset of shareholders. Accordingly, there is no plausible argument for legalizing insider trading.