Insider Trading: Hayek, Virtual Markets, and the Dog that Did Not Bark
ICER Working Paper No. 7-2005
26 Pages Posted: 30 Mar 2005
This Article briefly reexamines the great debates on the role of insider trading in the corporate system from the perspectives of efficiency of capital markets, harm to individual investors, and executive compensation. The focus is on the mystery of why trading by all kinds of insiders as well as knowledgeable outsiders was studiously ignored by the business and investment communities before the advent of insider trading regulation. It is hardly conceivable that officers, directors, and controlling shareholders would have remained totally silent in the face of widespread insider trading if they had seen the practice as being harmful to the company, to themselves, or to investors. By analogy with the famous article by Friedrich Hayek, The Use of Knowledge in Society, this Article considers the problem of obtaining necessary information for managers of large corporate enterprises. The suggested analytical framework views the share price, sensitively impacted by informed trading, as a mechanism for timely transmission of valuable information to top managers and large shareholders. Informed trading in the stock market is also compared to prediction or virtual markets currently used by corporations and policymakers.
Keywords: Insider Trading, Executive Compensation, Market Efficiency, Corporate Governance, Friedrich Hayek, Prediction Markets
JEL Classification: D82, G14, G30, K22
Suggested Citation: Suggested Citation