e firms will probably allocate those rights to corporate insiders to reduce insiders’ demands for fixed wages at little or no cost to outside shareholders. Additional reasons for permitting insiders to trade exist as well. Not all firms will find these benefits compelling. Rather, given immense variety of firms and the diversity of tastes and preferences among managers and shareholders, a blanket prohibition on trading by insiders is unlikely to be advantageous to all firms. Firms that wish to prohibit insider trading can do so by private negotiation with their managers. Insider trading will reduce insiders’ salary demands, this trading can benefit shareholders by bringing the interests of managers and shareholders closer together and causing managers to behave with less risk. Permitting insider trading might benefit shareholders, then such shareholders are better off by allocating the rights to trade in such information to the insiders. When this happens, insider trading can hardly be called unfair to the shareholders.In contrast many still believe that insider trading should remain illegal. One argument is that insider trading should be remained banned because it is unfair. In addition to the unfairness arguments, insider trading has been condemned on other grounds:(1)encourages managers to make to make risky investments.(2)imposes a “moral hazard” problem on corporate managers to profit on the basis of good news.(3)skews the process of information gathering and disseminationwithin firms.(4)causes a “lemons problem” within firms by making it (5)impossible for firms to tell whether the managers they are selecting will trade information or not.(5)drives investors from the marketplace by undermining public confidence in the integrity of the stock markets.(6)involves the misappropriation of corporate property. During most of the early history of the regulation of insider trading, the legal syst...
