The Importance of 'The Law of Conservation of Securities': A Reply to John P. Anderson's 'What's the Harm in Issuer-Licensed Insider Trading?'

80 Pages Posted: 14 Sep 2015 Last revised: 20 Dec 2015

See all articles by William K. S. Wang

William K. S. Wang

University of California, Hastings College of the Law

Date Written: September 12, 2015

Abstract

Professor John P. Anderson’s article, What’s the Harm in Issuer-Licensed Insider Trading?, argues that my “Law of Conservation of Securities” has no moral relevance to the question whether to allow such trading.

The Law of Conservation of Securities demonstrates that each stock market insider trade has specific victims and is “advantage-taking.” Some “advantage-taking” stock transactions are moral; others are not. To determine whether stock market insider trading is immoral, applying a principle such as utilitarianism or Professor Anthony Kronman’s “paretianism” requires consideration of the harm stemming from the conduct. The Law of Conservation of Securities identifies the victims of each insider trade and enables analysis of the indirect consequences of that injury, such as wider bid-ask spreads by market makers and impaired investor confidence -- both of which, in turn, increase firms’ cost of equity capital.

Specifying the actual victims also helps to determine whether the market would know how much to adjust share prices for the possibility of insider trading and whether such adjustments (even if accurate) would compensate all investors for the risk of injury. With corporation-approved insider trading, the issue also arises whether the decisionmakers adequately consider the interests of non-shareholder victims.

Keywords: law of conservation of securities, insider trading harm, insider trading victims, insider trading fraud, insider trading, securities regulation, white collar crime, fraud, utilitarianism, ethics, morality, Anderson, Katz, advantage-taking, Kronman, paretianism

JEL Classification: D61, D62, D63, D82, G18, G28, G31, G38, K13, K14, K22, K42

Suggested Citation

Wang, William Kai-Sheng, The Importance of 'The Law of Conservation of Securities': A Reply to John P. Anderson's 'What's the Harm in Issuer-Licensed Insider Trading?' (September 12, 2015). University of Miami Law Review, Vol. 69, p. 811, 2015; UC Hastings Research Paper No. 154. Available at SSRN: https://ssrn.com/abstract=2659674

William Kai-Sheng Wang (Contact Author)

University of California, Hastings College of the Law ( email )

200 McAllister Street
San Francisco, CA 94102
United States

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