In this weekend's Wall Street Journal, Donald Boudreaux wrote an excellent piece defending much insider trading while lampooning attempts to regulate it, over and above measures which corporations take to limit it.
Simply put, Boudreaux distinguishes between coming events which corporations will wish to keep secret, such as corporate acquisitions, and continuing situations and processes, such as accounting irregularities or incorrect investor expectations, of which anyone with full knowledge of the situation can take advantage, leading to more fully-informed market pricing.
Boudreaux makes a persuasive case that companies know better which information they want to protect, such as event-oriented acquisition information, far more so than federal regulators.
However, citing the Enron case, Boudreaux notes that insiders who would have had knowledge of Enron's fraudulent accounting and practices, and sold Enron shares on that basis, would have helped the market more correctly price the firm's shares lower.
Further, Boudreaux notes, current attempts to ferret out insider trading is biased. Regulators can only look for those who trade on generally-unknown news, not those who do not trade, but would have, absent generally-unknown news.
It's a very interesting and valid point. Insider knowledge of a failed drug certification, new product, etc., could lead someone to not buy shares. But this lack of otherwise-planned action will never be detected, leading to asymmetrical, unfair enforcement of the misguided federal notion of insider trading.
Boudreaux helpfully reminds us that markets serve to efficiently price securities by virtue of incorporating as much news as possible into their prices. The so-called 'price discovery' process.
Insider trading, he notes, contributes to this objective, rather than corrupts it. So why would we want to punish those who help make markets more efficient?
Subscribe to:
Post Comments (Atom)
No comments:
Post a Comment