How do you think the stock market would be affected if the laws were changed so...

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?

Expert Solution

Illegal Insider Trading

The more infamous form of insider trading is the illegal use of non-public material information for profit. It's important to remember this can be done by anyone including company executives, their friends and relatives, or just a regular person on the street, as long as the information is not publicly known.

For example, suppose the CEO of a publicly-traded firm inadvertently discloses their company's quarterly earnings while getting a haircut. If the hairdresser takes this information and trades on it, that is considered illegal insider trading, and the SEC may take action.

The SEC is able to monitor illegal insider trading by looking at the trading volumes of any particular stock. Volumes commonly increase after material news is issued to the public, but when no such information is provided and volumes rise dramatically, this can act as a warning flag. The SEC then investigates to determine precisely who is responsible for the unusual trading and whether or not it was illegal.

If the laws relating to the insider trading are stringent the insiders will not be able to use the ample information that they possess to make profits in a huge scale.And this enables the transparent trading of stock and shares in the market.Hence the true investor will get the benefits of price increases in the stock.

Goal of financial manager if such change were to occur

1. As and when there is a stringent law in the opposition of insider trading the financial manager can reduce his focus on the issues relating to the insider traders and can increase his tendency towards the economic development of the organisation and wealth maximisation of share holders as well.

2. Ample time of the financial manager and the resources of the entity can be provided to its development.

jeff jeffy answered 4 months ago

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