In light of recent doctrinal changes, we examine the confused state of U.S. insider trading law, identifying gaps that permit certain market participants to trade on the basis of material nonpublic information, and contrast U.S. insider trading doctrine with the European approach. We then explore the ethical implications of the status quo in the U.S., explaining why the dominant legal justifications for prohibiting classical insider trading and misappropriation—the fiduciary duty and property rights theories—fail to account for the wrongfulness of insider (...) trading by eavesdroppers and certain tippees. We refute common arguments for legalizing insider trading, including arguments that insider trading is a victimless crime and that the practice promotes efficiency. We explain why insider trading constitutes the moral wrong of cheating, grounding our theory in the legitimate expectations of market participants. Having considered Kantian deontology in other work, we find that virtue ethics theory offers a helpful albeit rough framework for assessing the morality of insider trading independent of its legality. We also find that social contract theories, with norms of equality of opportunity and moral desert, provide a compelling ethical basis for retaining, clarifying and broadening current legal prohibitions against insider trading. (shrink)

This study examines the impact of corporate social responsibility activities on insider trading. While opponents of insider trading claim that the buying or selling of a security by insiders who have access to non-public information is illegal, proponents argue that insider trading improves economic efficiency and fairness when corporate insiders buy and sell stock in their own companies. Based on extensive U.S. data of insider trading and CSR engagement, we find that both the number of insider transactions and the volume (...) of insider trading are positively associated with CSR activities.We also find that legal insider transactions are positively related to CSR engagement even after controlling for potential endogeneitybias and various firm characteristics. Furthermore, our evidence suggests that firms perceive adjustment to CSR dimension of product as being efficient, while adjustment to diversity and environmental CSR as being inefficient. Our results of bad and illegal insider trading proxies are consistent with the interpretation that firms with high CSR ratings do not attempt to engage in unethical or bad insider trading in a significant fashion. Combined together, we consider our empirical evidence supportive of the fairness and efficiency explanation, but not the unfairness and inefficiency hypothesis. (shrink)

This study investigates the likelihood of director turnover following opportunistic insider selling. Given that opportunistic insider selling may be costly to a firm due to potential legal risk and firm legitimacy concerns, we hypothesize that directors engaging in this type of transactions have a higher likelihood of subsequently leaving the board. Using archival data of 11,409 directors in 2280 US firms from 2005 to 2014, univariate comparisons show that directors engaging in opportunistic insider selling are about 8% more likely to (...) exit their firms’ board compared to directors not engaging in this behavior. Furthermore, multivariate results show that the likelihood of director departure following opportunistic insider selling is higher for some directors but not all. Specifically, directors who are especially valuable to the board or costly to replace do not seem to experience elevated levels of turnover. Interestingly, this difference in director turnover is only observed in smaller firms. We find that in larger firms, the likelihood of director turnover following opportunistic insider selling does not depend on director characteristics. As such, results seem to suggest that boards do not homogeneously self-regulate in this context as some directors seem to be shielded from turnover following unethical behavior. (shrink)

ABSTRACT:Legal scholars and business ethicists are interested in many of the same core issues regarding human and firm behavior. The vast amount of legal research being generated by nearly 10,000 law school and business law scholars will inevitably influence business ethics research. This paper describes some of the recent trends in legal scholarship and explores its implications for three significant aspects of business ethics research—methodology, theory, and policy.

We attempt to understand the personal incentives that motivate corporate insiders to engage in unethical behavior such as delayed trade disclosure. Delayed disclosure affects corporate transparency and other shareholders in the firm potentially suffer investment losses because they are unaware of insiders’ activities. Using archival data from the 300 largest Australian firms between 2007 and 2011, the results show that risk factors such as insider age and tenure and wealth effects in the form of insider shareholdings affect the likelihood of (...) delayed reporting. Governance positions such as committee membership mitigate this behavior. Our study highlights the importance of considering individual insider’s wealth and risk factors. The self-monitoring role of governance positions is also indicative of the effectiveness of internal corporate governance in the prevention of illegal insider behavior. (shrink)

Financial misconduct has come into the spotlight in recent years, causing market regulators to increase the reach and severity of interventions. We show that at times the economic benefits of illicit financial activity outweigh the costs of litigation. We illustrate our argument with data from the US Securities and Exchanges Commission and a case of investment misconduct. From the neoclassical economic paradigm, which follows utilitarian thinking, it is rational to engage in misconduct. Still, the majority of professionals refrain from misconduct, (...) foregoing economic rewards. We suggest financial activity could be reimagined taking into account intrinsic and prosocial motivations. A virtue ethics framework could also be applied, linking financial behavior to the quest for moral excellence and shared flourishing. By going beyond utilitarian thinking and considering alternative models, we offer a fuller account of financial behavior and a better perspective from which to design deterrence methods. (shrink)

Trading on non-public material information is fertile ground for a discussion of ethical behavior. The long-running legal tug-of-war over what constitutes illegal insider trading delivers challenges to regulatory authorities charged with detecting and enforcing the law, and is likely one of the reasons that prosecution of insider trading events remains rather uncommon. One can observe both increased volume in the equity and option markets and run-ups in the stock price prior to the announcement of the acquisitions; however, the detection of (...) illegal or unethical insider trading can be difficult. Given the legal uncertainty around insider trading and the circumstantial evidence from the trading activity, it is almost impossible to identify unethical insider trades unless there is a whistleblower or trades are large in size and impeccable in timing. Using call option trading around two merger announcements with similar firms that resulted in different ultimate treatment from the SEC, we illustrate the struggle regulators and prosecutors have with identifying and enforcing unethical insider trades. (shrink)