Economists have long known about the beneficial effects of insider trading. Up-to-date information is crucial for the proper functioning of a stock market, and insiders trade when stock prices, reflecting stale information, have diverged from reality. Insiders trade on newer information, nudging share prices toward reality and improving stock market efficiency. Still, it raises a thorny question: If insider trading is beneficial, where does the insider’s newfound wealth come from? Doesn’t it come from other investors who have been harmed? Why is it economically and morally acceptable for the insider to pocket the returns that would have enriched others?
‘Enforcement 40’ for 2020
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