When is it Wrong to Trade Stocks on the Basis of Inside Information? Public Views of the Morality of Insider Trading

Abstract

While the conduct that underlies traditional core offenses like murder and rape is viewed by the public as unambiguously wrong, there is less certainty about the behavior that underlies many newer white collar crimes. A previous study by the same authors examined public views of bribery, perjury, and fraud, and found an often blurry line between what subjects thought should be criminalized and what should not. The current set of studies focused on public perceptions of insider trading. Across three studies, lay participants were found to view the core case of insider trading, in which the trader obtained inside information by breaching a duty of loyalty to an employer or client, as highly blameworthy and worthy of criminalization. But when the same information was obtained by luck, trading was not viewed as blameworthy, despite the arguably unfair information advantage held. In this, lay views were consistent with current law in the U.S.

Lay views also tracked current law and practice with respect to several narrower issues. Subjects agreed with current practice that only insider trading resulting in a large amount of ill-gotten gains should result in criminal sanctions, while those trades resulting in comparatively small gains should be treated civilly. Lay subjects also agreed with current law that a tipper who gave inside information to a tippee should be prosecuted criminally only where his motives were selfish, and not when they were altruistic.Perhaps most strikingly, the study found that, though lay subjects had strong intuitions that insider trading was in some general sense morally wrong, they had real difficulty saying exactly what wrongs it entails and what harms it causes.

Keywords: insider trading, white collar crime

JEL Classification: K14, K22, K42