Question

1. Insider trading has been described as an ‘efficient signal’ of expected performance of the firm. Make an argument in favor of allowing insiders to trade on inside information.

2 Defend the passage of both Regulation FD, and Sarbanes-Oxley and the costs that they impose on the firm in the context of information asymmetry costs.

Answer 1

1. Insiders should be allowed to trade on inside information. This is due to the fact that when insiders trade on inside information there will be more efficient reaction to information with regards to a company and its stock. When insiders are allowed to trade on inside information investors will not rush to exploit any information that they think is floating in the market. This will lead to a situation in which prices of a stock is artificially inflated. When insiders are not allowed to trade on inside information then stocks will not have a gradual path to its appropriate value. In fact its path will be highly volatile.

Thus insiders should be allowed to trade on inside information so as to prevent sudden changes in price of a stock and to ensure that changes in stock prices are gradual.