Why Legalized Insider Trading Would Be a Disaster
George W. Dent, JR.
Although insider trading is illegal, a stubborn minority still defends it as an efficient means of compensating executives and spurring innovation. However, this minority assumes that legal insider trading would be constrained by the personal wealth of the insiders so that the scope of insider trading would rarely or never be so large as to cause outsiders to stop trading in affected stocks. This Note argues that there would be no such constraint because insiders could obtain outside financing to fully exploit their informational advantage. Outsiders would flee the public stock markets, which would drastically shrink or disappear. The prospect of huge trading profits would induce managers to change many decisions, often to the detriment of the firm, in ways that would be virtually impossible for corporate monitors to detect. Accordingly, the case of legalizing insider trading is insupportable.