The Consequences of Insider Trading and the Role of Academic Research

Abstract

Insider trading has been of particular interest to society in the past de cade because of a series of schemes that have netted insiders millions. Names like Boesky, Milken, and Levine have become commonplace to followers of financial news and the general public alike. This higher level of interest has been generated by the rise of a new breed of Wall Street insider. Rather than being an officer, director, or large minority shareholder, they could be professional or clerical personnel, employees of the company to which the information relates, or individuals with whom the company may or may not maintain a business relationship. Several recent papers have discussed the ethical arguments against insider trading [e.g., Irvine, 1987; Moore, 1990]. However, little attention has been given to the issue of how to control insider trading given the ethical arguments against it. The purpose of this study is threefold. First, it will identify the three varieties of insiders. Second, the arguments against insider trading will be critically evaluated in light of their applicability to each of the insider categories. Finally, alternatives for controlling insider trading will be discussed, as will the role of academic research as an approach to evaluating insider trading that enables the consequences to be addressed without weakening the information market.