Insider Trading: An Ethical Analysis

Abstract

Insider trading has received a great deal of bad press in recent decades. Nearly every article in the popular press that has been written about it views the practice in a negative light. However, the economics and legal literature are mixed on the issue. This article examines the economics and legal literature and applies several sets of ethical principles with the goal of determining when insider trading constitutes unethical conduct and when it should be prohibited. The conclusion is that the key to determining when the practice should be prohibited should not depend upon a utilitarian analysis because utilitarian approaches cannot provide clear guidance. A better approach would be to determine whether a fiduciary duty has been breached or whether rights have been violated.

Keywords: insider trading, ethics, utilitarian, rights theory, virtue ethics, fiduciary duty, general welfare, positive-sum game, level playing field

JEL Classification: D23, D60, D61, D63, G14, G18, G30, G34, K11, K20, K22