Skip to main content

Advertisement

SpringerLink
Log in

Applying Ethics to Insider Trading

  • Published:
Journal of Business Ethics Aims and scope Submit manuscript

Abstract

Insider trading has received a bad name in recent decades. The popular press makes it sound like an evil practice where those who engage in it are totally devoid of ethical principles. Yet not all insider trading is unethical and some studies have concluded that certain kinds of insider trading are actually beneficial to the greater investment community. Some scholars in philosophy, law and economics have disputed whether insider trading should be punished at all while others assert that it should be illegal in all cases. This paper explores the nature of insider trading and analyzes the issues to determine the positive and negative aspects of insider trading, and how policy should be changed. The best hope would be for studies to be made that isolate the individuals or groups who are fraudulently harmed by insider trading. If any such groups exist, then clearly worded legislation could be passed to prevent any fraud from being committed against these individuals and groups, while allowing non-fraudulent transactions to be completed without fear of prosecution. Until it can be clearly determined that someone is fraudulently harmed by insider trading, there should be no law or regulation restricting the practice, since such restrictions violate individual rights and will likely have a negative market reaction.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

References

  • Anderson, W.: 2002, The Attack on Martha (The Ludwig von Mises Institute, Auburn, AL), June 26. www.mises.org

  • Anderson, W. L.: 2003a, ‚Martha and the Media’, LewRockwell.com, June 13

  • Anderson, W. L.: 2003b, Martha Stewart: Political Prisoner (The Ludwig von Mises Institute, Auburn, AL), June 9, www.mises.org

  • Aquinas, St. Thomas. Summa Theologica, II-II, Q.77

  • Bandow, D.: 1988, ‚Curbing Raiders is Bad for Business’, The New York Times, February 7

  • Barath D. (1960) The Just Price and the Costs of Production According to St. Thomas Aquinas. New Scholasticism 34, 413–430

    Google Scholar 

  • Bartell E. (1962). Value, Price, and St. Thomas. The Thomist 25(3), 359–360

    Google Scholar 

  • Bernardo A. E. (2001) Contractual Restrictions on Insider Trading: A Welfare Analysis. Economic Theory 18, 7–35

    Article  Google Scholar 

  • Bhattacharya U., Daouk H. (2002). The World Price of Insider Trading. The Journal of Finance 57(1), 75–108

    Article  Google Scholar 

  • Boatright J. R. (1997) Fiduciary duty In: Werhane P. H., R. E. Freeman, (eds), The Blackwell Encyclopedic Dictionary of Business Ethics. Blackwell, Oxford

    Google Scholar 

  • Boudreaux, D. J.: n.d., ‚Insider-Trading Prohibitions Should Go out of Style’, Future of Freedom Foundation, Fairfax, VA, no date. www.fff.org

  • Bovard J. (1991) The Fair Trade Fraud. St. Martin’s Press, New York

    Google Scholar 

  • Brudney V. (1979) Insiders, Outsiders, and Informational Advantage under the Federal Securities Law. Harvard Law Review 93, 322–376

    Article  Google Scholar 

  • Bubb F. W. (1986) Hostile Acquisitions and the Restructuring of Corporate America. The Freeman, May, 36(5), 166–176

    Google Scholar 

  • Buttarazzi, J. E.: 1987, ‚Corporate Takeovers: What is the Federal Role?’ Backgrounder 606, The Heritage Foundation, September 29

  • Carlton D. W., Fischel D. R. (1983) The Regulation of Insider Trading. Stanford Law Review 35(5), 857–895

    Article  Google Scholar 

  • Central Hudson Gas & Electric Corporation v. Public Service Commission: 1980, 447 U.S. 557

  • Chiarella v. United States: 1980, 445 U.S. 222

  • Coffee, J. C., Jr., J. A. Grundfest, R. Romano and M. L. Weidenbaum: 1988, ‚Corporate Takeovers: Who Wins; Who Loses; Who Should Regulate?’ Regulation 88(1), 23–29, 47–51

    Google Scholar 

  • Crisp R. (1997) Mill on Utilitarianism. Routledge, London and New York

    Google Scholar 

  • Dalcourt G. J. (1965) The Philosophy and Writings of St. Thomas Aquinas. Simon and Schuster/Monarch Press, New York

    Google Scholar 

  • Demsetz H. (1969) Perfect Competition, Regulation, and the Stock Market, In: Henry G. Manne (eds.), Economic Policy and the Regulation of Corporate Securities. American Enterprise Institute, Washington, DC

    Google Scholar 

  • Dirks v. Securities and Exchange Commission, 463 U.S. 646 (1983)

  • Dooley M. P. (1980) Enforcement of Insider Trading Restrictions. Virginia Law Review 66, 1–83

    Article  Google Scholar 

  • Dostoevsky, F.: 1952,‚The Brothers Karamazov’, in M. H. Robert, editor in chief, Great Books of the Western World, Vol. 52 (Encyclopedia Britannica, Chicago)

  • Easterbrook, F. H.: 1981. ‚Insider Trading, Secret Agents, Evidentiary Privileges, and the Production of Information. Supreme Court Review II, 309–365

    Google Scholar 

  • Engelen, P. J. and L. Van Liedekerke: 2003, An Ethical Analysis of Regulating Insider Trading. Fifth International Conference on Ethics and Environmental Policy, Kyiv, April 2–6. Reprinted at www.fondazionelanza.it/epa/abstract/engelen_full.pdf

  • Fama, E. and A. Laffer: 1971, ‚Information and Capital Markets’, Journal of Business July, 289–298

  • Federal Securities Law Reports, No. 1304, Part II, September 21, 1988

  • Finnerty J. E. (1976) Insiders and Market Efficiency. The Journal of Finance 31(4), 1141–1148

    Article  Google Scholar 

  • Fleischer, Mundheim and Murphy: 1973, ‚An Initial Inquiry into the Responsibility to Disclose Market Information’, University of Pennsylvania Law Review 121, 798–841

  • Frey R. G. (eds), (1984). Utility and Rights. University of Minnesota Press, Minnedapolis

    Google Scholar 

  • Goodin R. E. (1995) Utilitarianism as a Public Philosophy. Cambridge University Press, Cambridge, UK and New York

    Google Scholar 

  • Herzel, L. and L. Katz: 1987, ‚Insider Trading: Who Loses?’ Lloyds Bank Review July, 15–26

  • Hetherington J. A. C. (1967) Insider Trading and the Logic of the Law. Wisconsin Law Review 1967, 720–737

    Google Scholar 

  • Jarell G. A., Brickley J. A., Netter J. M. (1988) The Market for Corporate Control: The Empirical Evidence Since 1980. Journal of Economic Perspectives 2(1), 49–68

    Google Scholar 

  • Jensen M. C. (1984) Takeovers: Folklore and Science. Harvard Business Review 62(6), 109–121

    Google Scholar 

  • Johnson J. A. (1986–1987) Antitakeover Legislation: Not Necessary, Not Wise. Cleveland State Law Review, 35, 303–348

    Google Scholar 

  • Kelly W. A., Nardinelli Jr. C., Wallace M. S. (1987) Regulation of Insider Trading: Rethinking SEC Policy Rules. The Cato Journal 7(2), 441–448

    Google Scholar 

  • Lehmann, J.: 2004, ‚Martha’s Head on a Platter’, New York Post, Florida edition, March 6, pp. 2–3

  • Leland H. E. (1992) Insider Trading: Should it be Prohibited?. Journal of Political Economy 100(4), 859–887

    Article  Google Scholar 

  • Lowe v. SEC, 105 S.Ct. 2557 (1985)

  • Macey J. R. (1988) The SEC’s Insider Trading Proposal: Good Politics, Bad Policy. Policy Analysis No. 101. Washington, DC: Cato Institute, March 31, p. 2

    Google Scholar 

  • Machan T. (1996) What is Morally Right with Insider Trading?. Public Affairs Quarterly 10(2), 135–141

    Google Scholar 

  • Manne H. G. (1966a) Insider Trading and the Stock Market. The Free Press, New York

    Google Scholar 

  • Manne, H. G.: 1966b, ‚In Defense of Insider Trading’, Harvard Business Review November/December, 113–122

  • Manne H. G. (1970) Insider Trading and the Law Professors. Vanderbilt Law Review 23, 547–590

    Google Scholar 

  • Manne, H. G.: 1985, ‚Insider Trading and Property Rights in New Information’, The Cato Journal 4(3), 933–943, reprinted in James A. Dorn and Henry G. Manne (eds.), Economic Liberties and the Judiciary. Fairfax, VA: George Mason University Press, 1987, 317–327

  • Manne, H. G.: 1986, ‚The Real Boesky-Case Issue’, The New York Times, November 25, A-27, column 1

  • Martin J. K. (1986) Insider Trading and the Misappropriation Theory: Has the Second Circuit Gone Too Far?. St. John’s Law Review 61, 78–112

    Google Scholar 

  • McDowell, C.: 2003, ‚The Non-Crime of Insider Trading’, June 11. LewRockwell.com

  • McGee R.W. (1994) The Fatal Flaw in NAFTA, GATT and All Other Trade Agreements. Northwestern Journal of International Law, Business 14(3), 549–565

    Google Scholar 

  • McMenamin M. (1988) Witchhunt. Reason 20(5), 34–40

    Google Scholar 

  • McMenamin, M. and W. Gorenc, Jr.: 1983, ‚Subverting the First Amendment’, Reason January, 23–28

  • Moore J. 1990. What is Really Unethical about Insider Trading?. Journal of Business Ethics 9, 171–182

    Article  Google Scholar 

  • Morgan R. J. (1987) Insider Trading and the Infringement of Property Rights. Ohio State Law Journal 48, 79–116

    Google Scholar 

  • Nash, N. C.: 1988, ‚Congress Passes Greater Penalties and Detection on Insider Trading’, The New York Times, October 22, 1, 31

  • Nozick R. (1974) Anarchy, State, and Utopia. Basic Books, New York

    Google Scholar 

  • O’Hara P. A. (2001) Insider Trading in Financial Markets: Legality, Ethics, Efficiency. International Journal of Social Economics 28(10, 11, 12), 1046–1062

    Article  Google Scholar 

  • Ostrowski, J.: 2002, Wanted for Outsider Trading (The Ludwig von Mises Institute, Auburn, AL), August 26. www.mises.org

  • Padilla A. (2002a) Can Agency Theory Justify the Regulation of Insider Trading?. The Quarterly Journal of Austrian Economics 5(1), 3–38

    Article  Google Scholar 

  • Padilla, A.: 2002b, ‚The Modern Witch Hunt’, LewRockwell.com, October 22

  • Peyser, A.: 2004, ‚Arrogant Billionaire Played The Ultimate Fool’, New York Post, Florida edition, March 6, p. 4

  • Powe Jr. L. A. (1987) American Broadcasting and the First Amendment. University of California Press, Berkeley and Los Angeles

    Google Scholar 

  • Prychitko, D. L.: 1987, Corporate Takeovers and Shareholder Interests. Issue Alert No. 13 (Citizens for a Sound Economy, Washington, DC)

  • Qu C. Z. (2001) An Outsider’s View on China’s Insider Trading Law. Pacific Rim Law Policy Journal, 10, 327–352

    Google Scholar 

  • Ricardo D. (1871/1996) Principles of Political Economy and Taxation. Prometheus Books, Amherst, NY

    Google Scholar 

  • Rider B. A., Ffrench L. (1979) The Regulation of Insider Trading. Oceana, Dobbs Ferry, NY

    Google Scholar 

  • Romano R. (1987) The Political Economy of Takeover Statutes. Virginia Law Review 73, 111–199

    Article  Google Scholar 

  • Ronen J. (1977) The Effect of Insider Trading Rules on Information Generation and Disclosure by Corporations. The Accounting Review 52(2), 438–449

    Google Scholar 

  • Rothbard M. N. (1970) Man, Economy and State. Nash Publishing, Los Angeles

    Google Scholar 

  • Salbu S. R. 1992. A Critical Analysis of Misappropriation Theory in Insider Trading Cases. Business Ethics Quarterly 2(4), 465–477

    Article  Google Scholar 

  • Schoeck H. (1966) Envy. Harcourt Brace and World, New York

    Google Scholar 

  • Schotland R. A. (1967) Unsafe at Any Price: A Reply to Manne, Insider Trading and the Stock Market. Virginia Law Review 53, 1425–1478

    Article  Google Scholar 

  • Scott K. E. (1980) Insider Trading: Rule 10b-5, Disclosure and Corporate Privacy. Journal of Legal Studies 9, 801–818

    Article  Google Scholar 

  • Shaw W. H. (1999) Contemporary Ethics: Taking Account of Utilitarianism. Blackwell, Malden, MA and Oxford

    Google Scholar 

  • Sheaffer R. (1988) Resentment Against Achievement: Understanding the Assault Upon Ability. Prometheus Books, Buffalo

    Google Scholar 

  • Smith A. (1776/1953) The Wealth of Nations. Henry Regnery Company, Chicago

    Google Scholar 

  • Strudler A., Orts E. W. (1999). Moral Principle in the Law of Insider Trading. Texas Law Review 78, 375–438

    Google Scholar 

  • United States v. Carpenter, 791 F.2d 1024 (1986)

  • Webster’s New World Dictionary of the American Language: 1964, College edition (Cleveland and New York: World Publishing Co.)

  • Werhane P. H. (1989). The Ethics of Insider Trading. Journal of Business Ethics 8, 841–845

    Article  Google Scholar 

  • Wolfson N. (1987) Civil Liberties and Regulation of Insider Trading. In: Dorn J. A., Manne H. G. (eds.), Economic Liberties and the Judiciary. George Mason University Press, Fairfax, VA, (pp. 329–334)

    Google Scholar 

  • Woodward, S. E.: 1988, ‚How Much Indiana’s Anti-Takeover Law Cost Shareholders’, The Wall Street Journal, May 5

  • Wu H. K. (1968) An Economist Looks at Section 16 of the Securities Exchange Act of 1934. Columbia Law Review 68, 260–269

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Department of Accounting, Barry University, Andreas School of Business, Miami Shores, FL, 33160, USA

    Robert W. McGee

Authors
  1. Robert W. McGee
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Robert W. McGee.

Additional information

Robert W. McGee is a professor at the Andreas School of Business, Barry University in Miami, Florida, USA. He has published more than 50 books and more than 400 scholarly papers in the fields of accounting, taxation, economics, law, philosophy and ethics. He holds doctorates in several fields, including accounting, economics, law and philosophy. He is an attorney and a certified public accountant (CPA).

Rights and permissions

Reprints and permissions

About this article

Cite this article

McGee, R.W. Applying Ethics to Insider Trading. J Bus Ethics 77, 205–217 (2008). https://doi.org/10.1007/s10551-006-9344-6

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10551-006-9344-6

Keywords

Search

Navigation