Research paper Essay Example | Topics and Well Written Essays - 1250 words - 2

Research paper - Essay Example Company insiders are in a unique position to make forecasts about the future risk and return of the shares and bonds of their company, hence they might often correctly perceive market prices to be "too low" or "too high". When they trade on the secondary market, they serve to feed their knowledge into prices, thus making markets more efficient. Insider trading is often equated with market manipulation, yet the two phenomena are completely different. Manipulation is intrinsically about making market prices move away from their fair values; manipulators reduce market efficiency. Insider trading brings prices closer to their fair values; insiders enhance market efficiency† (Shah, 1998). Shah points out, however, that even under this assumption about insider-trading which is largely favorable, that the efficiency gains only trickle out throughout the economy and prevent unjust inequality when there are reporting requirements so that non-insiders can benefit (in theory) from insider gains. However, as Insider Today (2011) points out, â€Å"[T]here are normally around 2000 filings each day and many of them are of no value to individual investors. It is very hard for an individual to digest the amount of information and still have the time to act on it†. Unfortunately, there is a direct tradeoff between enforcement and preserving a signal-to-noise ratio. Enforcement of insider trading laws has two intents: First, it requires reporting of legitimate insider trading so that the knowledge that insiders have is able to trickle into the general economy; second, it punishes illegitimate trading. Increasing enforcement to get the bad guys requires reporting that reduces the value of the information from the good guys. Nonetheless, insider trading's intent is highly justified. One can make an argument that insider trading leads to greater market efficiency in the short-term, but the problem is that it clearly leads to inequality in the medium term and therefore i nefficiency in the long-term. Seyhun (2000, 300-350) found that people trading insider stocks made on average 8.9% more than the market when stocks were good and lost 5.4% less when they were bad. People with insider information are generally, though not always (as we shall see with the example of the railroad workers), people with privileged access to the top of a hierarchy. They're already people like Martha Stewart, Madoff, CEOs or brokers: People who have superior access to information. Based on past societal inequalities, it is likely that those people will be of favored ethnic groups, of the favored gender, etc. These people see their stocks grow more, while investors outside their circle can't compete. These investors then become richer, which leads to increased inequality, which leads to decreased growth over time for a variety of reasons: The newly rich can engage in bona fide market distortion, amassed wealth allows people to ignore market discipline, inequality requires a larger state sector, inequality tends to lead to more capital shocks, etc. (Rodrik, 1999; Reich; Knowles, 2005; Klein, 2010). Worse, if someone within the company divests stock before shareholders can, that is fraud against shareholders who are being given