Insider Trading Regulation in Transition Economies

Abstract

Insider trading in the United States has been receiving a lot of press coverage in recent years. The press has given the public the impression that insider trading is evil, unethical and illegal, when in fact such is not always the case. In some cases, insider trading is beneficial to the economy and to shareholders. It is not always unethical and it is not always illegal. Whether insider trading is harmful, unethical or illegal depends on many factors, yet the press ignores such nuances. A number of economists have pointed out some beneficial effects of insider trading and legal theorists have written treatises discussing when insider trading is illegal and when it is not. Philosophers have said some good things about insider trading, too, but their scholarly treatises have, understandably, been ignored by journalists.

Policymakers in transition economies are trying to reform their legal and economic systems to more closely reflect those of the developed market economies. The OECD, World Bank, IMF and other organizations are assisting them in this endeavor. One aspect of their reform is to adopt insider trading laws and regulations that mirror those of the developed western economies. However, those policies are often flawed because they tend to outlaw some forms of insider trading that are beneficial to the economy and not unethical in nature.

This paper begins with an overview of the different philosophical approaches that may be taken toward insider trading, then reviews the basic theoretical and empirical literature on insider trading in an attempt to differentiate good insider trading from bad insider trading. The paper then examines some documents that policy makers in transition economies rely on when making laws and regulations regarding insider trading. The paper concludes with some recommendations and guidelines.

Keywords: insider trading, transition economy, ethics, utilitarian

JEL Classification: D63, G34, G3, K22, P2