|Reply to Merlin Jetton:|
As I said, this deserves cold consideration. My reply here barely suffices. The issue is complicated, and, in fact, is many problems centered under one label, "insider trading." No surprise, also, as I indicated in my "Libor" post, I initially went with the free market minority on this, by reflex. However, after crafting some thoughts overnight, as you can see above in #51, I changed my opinion on this. That said, my present view now is not 180 degrees full about.
Before I comment directly on your original post, I call up a scene in Atlas Shrugged in which Lilian Rearden asks Hank about a d'Anconia disaster, "He had a duty to his stockholders, didn't he?" Years later, Ayn Rand demolished the concept of duty. She did not do that in her speech at West Point, however, and that allows us to re-open the question of duty.
Some say it is unfair simply if the buyer and seller have unequal information, the one with insider information presumably having more, especially material information the other party doesn't have. However, that is not my argument. I read a contradiction in that. You do seem to be making the argument that insider trading is unfair because it diminishes property rights, or that the diminution is the signal of unfairness.
All outside shareholders should have equal opportunity to get material information from insiders and act upon it at the same time. For insiders to selectively favor some shareholders (even non-shareholders) over other shareholders in getting such material information is a diminution of property rights of the shareholders who don't get the same information, or at least have the opportunity to get it.
All shares carry equal rights -- to vote, receive dividends, and receive financial reports such as quarterly earnings. Inside shareholders and other favored shareholders do not pay more for their shares to justify such privileges as receiving more information, getting it sooner, or receiving higher dividends per shareBut different shares could carry different rights. The "dual investment" instruments of the 1960s are still with us, though not so popular. The same certificate entitles the holder to either of two payments: increased face value on the stock, or the receipt of a dividend. Also, as you note, preferred stock and bonds are different instruments as well. Would you approve of bond holders receiving information denied to those who own common stock, and them both from employees or creditors? Different people do get different information via different paths.
I recommend those who believe insider trading should be completely legal imagine ... It would be absurd to try to restrict those on a government payroll to not take advantage of material nonpublic information such as legislation-to-be or a future announcement about whether or not a drug will be approved or disapproved by the Food & Drug Administration.That speaks to the climate of regulation in a mixed economy, but the fact is that all such information is readily used by those who have it. You can overhear people talking at Starbucks. Where do we draw the line? Well, as I said, a non-disclose contract draws a very bright line. Without one, though, we are talking about personal ethics, perhaps a more important consideration, if not the most. Even if it were not illegal, would it still be wrong? I think so.
In Atlas Shrugged, following a d'Anconia disaster, Lilian Rearden asks Hank, "He had a duty to his stockholders, didn't he?" Years later, Ayn Rand demolished the concept of duty -- but she did not do that in her speech at West Point, which allows us now to re-open the question of duty. The executor of a trust has a duty to act in their client's best interests, even if it is contrary to their own.
They might, in any number of ways. That is how one gets inside. Shares cost more early on when the risk is greater, even if the price is the same years later. The wife puts up with a lot to make the husband successful. Paint any story you want. The price quoted on the exchange is just the core value.
Inside shareholders and other favored shareholders do not pay more for their shares to ...
And what about the time spent learning to read a quarterly report or a 10K? Perhaps it is nominally available to "everyone" but I think that we invest a lot via trust. As I said, capitalism is more than a succession of shady deals at flea markets. Even without government regulations, the stock exchanges have rules of conduct.
As I pointed out in #51 above, a corporation holds a large block of its own shares. Not only do the actions of insiders or outsiders matter, but those acting for the corporation have the opportunity to engage in special trades based on special knowledge not available to others.
The trade does not move capital from X to Y.
The same information might be discovered (or inferred) by anyone who watches the companies involved, knows them and their markets, and expects a merger (or spin-off), and buys or sells accordingly. It would take a smoking gun of emails, diaries, etc., to prove your charge, but let us assume that it stands as you claim. Then, those inside are under a special burden to know less than an outsider, or to act as if they do. That seems curious, perhaps, but it is the nature of a trust relationship.
If material nonpublic information about the intended acquisition is leaked ...
Lastly, with no ban, anyone could claim to have "inside info". Imagine all the rumors and consequent fact-checking required. Would that increase market efficiency?
You allude to the plethora of sucker sheets out there already. You have to learn to whom to trust and in what contexts. You assume that people are providing information. Some must be leaking disinformation, lies, and fake-outs. How do you sort that out? Basically, each of us decides whom to trust under what circumstances.
But, again, you can get your information by overhearing people at Starbucks. Most companies discourage employees from talking shop outside the doors for this very reason. An engineer who disassembles a competitive product knows much more about the future of that company than most people, including, perhaps, the CEO.
What is moral about a corporation selectively giving material information to somebody such as Martha Stewart or Raj Rajaratnam (even non-shareholders) without telling other shareholders? For those who contend it is okay for a corporation to treat its shareholders unequally, how far does that go? Would it be fair to pay unequal dividends per share, too?
I agree with your main thesis: insider trading diminishes the contractual rights of shareholders. But I have no clear idea of the number or reach of those rights... or what to do about the problem... I guess the only sound advice is to know your limitations.