Journal of Business Ethics

, Volume 139, Issue 1, pp 47–53 | Cite as

The Economics of Insider Trading: A Free Market Perspective

  • Taylor Smith
  • Walter E. BlockEmail author


We deny that asymmetrical information is a market failure. In order to make this case, we subject to critical scrutiny the strongest case for this thesis: the view that laws prohibiting insider trading are viable, necessary, or compatible with the rule of law.


Insider trading Asymmetrical information Market failure Rule of law 

Mathematics Subject Classification



  1. Bagehot, W. (1971). The only game in town. Financial Analyst Journal, 27, 28–35.CrossRefGoogle Scholar
  2. Bainbridge, S. M. (2002). Corporation law and economics. New York, NY: Foundation.Google Scholar
  3. Bainbridge, S. M. (2006). Introduction. In H. G. Manne (Ed.), The collected works of Henry G. Manne (Vol. 2). Los Angeles: Liberty Fund.Google Scholar
  4. Bhattacharya, U., & Daouk, H. (2002). The world price of insider trading. Journal of Finance, 57, 75–108.CrossRefGoogle Scholar
  5. Block, W. E., & McGee, R. W. (1992). Insider trading. In R. W. McGee (Ed.), Business ethics and common sense (pp. 219–229). New York: New York Quorum Books.Google Scholar
  6. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 737 (1975).Google Scholar
  7. Bris, A. (2005). Do insider trading laws work. European Financial Management, 11, 267–312.CrossRefGoogle Scholar
  8. Carlton, D. W., & Fischel, D. R. (1983). The regulation of insider trading. Stanford Law Review, 35, 857–895.CrossRefGoogle Scholar
  9. Coase, R. H. (1960). The problem of social cost. Journal of Law and Economics, 3, 1–44.CrossRefGoogle Scholar
  10. Cox, J. D. (1986). Insider trading and contracting: A critical response to the ‘Chicago School’. Duke Law Journal, 1986, 628–659.CrossRefGoogle Scholar
  11. Dolgopolov, S. (2004). Insider trading and the bid-ask spread: A critical evaluation of adverse selection in market making. Capital University Law Review, 33, 83–180.Google Scholar
  12. Dooley, M. P. (1999). Comment from an enforcement perspective 50. Case Western Reserve Law Review, 319, 321–322.Google Scholar
  13. Friedman, D., Harrison, G. W., & Salmon, J. W. (1984). The information efficiency of experimental asset markets. Journal of Political Economy, 92(3), 349–408.Google Scholar
  14. Gilson, R., & Kraakman, R. (1984). The mechanisms of market efficiency. Virginia Law Review, 70, 549–644.CrossRefGoogle Scholar
  15. Haddock, D. D., & Macey, J. R. (1987). Regulation on demand: A private interest model, with an application to insider trading regulation. The Journal of Law and Economics, 30, 311–352.CrossRefGoogle Scholar
  16. Haft, R. J. (1982). The Effect of Insider Trading Rules on the Internal Efficiency of the Large Corporation. Michigan Law Review, 1051-1071.Google Scholar
  17. Hebner, K. J., & Kato, T. (1997). Insider trading and executive compensation: Evidence from the U.S. and Japan. International Review of Economics and Finance, 80, 223–237.Google Scholar
  18. Hu, J., & Noe, T. H. (1997). The Insider Trading Debate. Federal Reserve Bank of Atlana Economic Review, 82, 34–45.Google Scholar
  19. Levitt, A. (1998, February 27). A Question of Integrity: Promoting Investor Confidence Figting Insider Trading. Retrieved November 4, 2013, from U.S. Securities and Exchange Commission:
  20. Lin, J.-C., & Rozeff, M. S. (1995). The speed of adjustment of prices to private information: Empirical tests. Journal of Financial Research, 18, 143–156.CrossRefGoogle Scholar
  21. Loss, L. (1970). The fiduciary concept as applied to trading by corporate ‘Insiders’ in the United States. Modern Law Review, 33, 34–52.CrossRefGoogle Scholar
  22. Manne, H. G. (1966). Insider trading and the stock market. New York: Free.Google Scholar
  23. Manne, H. G. (2003). The Case for Insider Trading. Wall Street Journal-Eastern Edition, 241, A14.Google Scholar
  24. Manne, H. G. (2006). Insider trading: Hayek, virtual markets, and the dog that did not bark. In H. G. Manne (Ed.), The collective works of Henry G. Manne (Vol. 2). Indianapolis: Liberty Fund.Google Scholar
  25. McGee, R. W., & Block, W. E. (2004). An ethical and economic look at insider trading. In A. D. Wolf (Ed.), Ordered anarchy: Festschrift essays in honory of Anthony de Jasay. Arlington, VA: Singularity Press.Google Scholar
  26. Meulbroek, L. K. (1992). An empirical analysis of insider trading. Journal of Finance, 47, 1661–1699.CrossRefGoogle Scholar
  27. Mises, L. V. (1922). Socialism: An economic and sociological analysis. Indianapolis: Liberty Fund.Google Scholar
  28. Morgenson, G. (2012, May 19). Is insider trading part of the fabric on wall street. New York Times.Google Scholar
  29. Pettit, R. R., & Venkatesh, P. C. (1995). Insider trading and long-run return performance. Financial Management, 24, 88–105.CrossRefGoogle Scholar
  30. Rothbard, M. N. (1982). The ethics of liberty. Atlantic Highlands, NJ: Humanitites Press.Google Scholar
  31. Rothbard, M. N. (1990). Law, property rights, and air pollution. In W. E. Block (Ed.), Economics and the environment: A reconciliation (Vol. 2, pp. 233–279). Vancouver: The Fraser Institute.Google Scholar
  32. Schotland, R. (1967). Unsafe at any price: A reply to Manne. Virginia Law Review, 53, 1425–1478.CrossRefGoogle Scholar
  33. SEC v. Texas Gulf Sulphur Co., 401. F2d 833, 84 8 (2d Cir 1968), cert. denied, 394 U.S. 976 (1969). (Second Circuit 1969).Google Scholar
  34. Securities and Exchange Commission. (2000). Final rule: Selective disclosure and insider trading. Retrieved November 4, 2013, from U.S. Securities and Exchange Commission:
  35. Securities and Exchange Commission. (n.d.). Insider trading. Retrieved November 4, 2013, from U.S. Securities and Exchange Commission:
  36. Smith, A. (1776/2001). An inquiry into the nature and causes of the wealth of nations. Hayes Barton Press.Google Scholar
  37. Thurber, S. (1994). The insider trading compensation contract as an inducement to monitoring by the institutional investor. George Mason University Law Review, 1, 313–316.Google Scholar
  38. Wilgus, H. L. (1910). Purchase of shares of corpoation by a director from a shareholder. Michigan Law Review, 80, 1051–1071.Google Scholar

Copyright information

© Springer Science+Business Media Dordrecht 2015

Authors and Affiliations

  1. 1.Joseph A. Butt, S.J. College of BusinessLoyola University New OrleansNew OrleansUSA

Personalised recommendations