Can Regulation of Insider Trading Be Effective - Essay Example

Organizations which aim towards long term success of the business and the stakeholders need to ensure that the employees at various positions within the organization carry out their different roles and responsibilities truthfully and morally. Employees at no juncture should look towards using the inside information for their own personal interest rather it should be looked towards improving the conditions of the stakeholders which includes the employees himself. To deal with the issues organizations have developed a policy of whistle blowers who aim towards bringing forward any acts which results in the misuse of insider information. This essay thereby focuses on the aspect of insider trading and helps to present whether employees should use the insider information for their personal gains? Will the situation of using insider information will be judge moral or immoral? The different measures and steps which need to be developed to ensure that employees act in a correct manner and the different fundamentals which have to be followed. This will help to bring a complete change and transformation which would thereby help the organization to act morally and look towards the development of the stakeholders. Employees within the organization need to act ethically and have to ensure that the information which they have is neither leaked nor used for their advantage. There is a consensus among law, economics and finance scholars regarding the complete prohibition of using insider information for their own advantage as it discourages investment in the capital market (Shin, 2000). Organizations need to develop policies which aim at banning the use of insider information as it leads towards market failures because information is not perfectly shared by all stakeholders. This could benefit certain people of the society but the stakeholders on the whole looses. The government is also stringent with regard to the use of insider information as it creates a lack of perfect competition which creates differences between the societies. This is further matched by the fact that employees should further remain morally correct and should not indulge in activities which results in the use of insider information to their advantage (Strasburg and Chad, 2009). This could have a negative impact on the long term prospect of the organization and will create doubts in the mind of the people regarding the corporate governance policies which have been adopted by the organization. Insider trading when employees use the information for their own purpose creates moral hazards. Using the information by employees based on their position would lead towards short term profits and gains for the employee who indulge in such activities but would have a negative impact on the long term performance. To deal with the issue organizations have adopted a policy of whistle blowers which looks towards bringing forward the different issues related to insider information (Viday, 2007). This helps the management to come forward towards the different issues which is being felt by the business and helps to identify the factor through which such insider trading can be restricted. This would help to ensure that the impact which the organization could have due to insider trading will be reduced and will provide an overview through which gains for the business will be achieved. A process of insider trading where employees aim towards using information for their personal gains would result a gain for the employees regardless of the fact whether the share prices goes up or down. This thereby tempts employees to use the different information for their own gains which can be controlled only if the employees act morally and ensure that the different decisions which they undertake are aimed towards the improving the condition of the stakeholders. Leaving the same on the stakeholders will make the process ineffective as stakeholders don’t have the adequate enforcement devices which will help to reduce the misuse of information (Padilla, 2007). This will thereby lead towards asymmetry of information and is an aspect which holds the attention of the different stakeholders associated with the organization. Corporations and stakeholders have to deal with an adverse situation where even if employees develop a contractual prohibition policy it doesn’t provide the guarantee that employees will act morally correctly and would not use the information for their personal gains. This will require that the employees will have to be driven by their value system and need to act morally so that they are able to bring a change in the working style. Employees need to act morally and ensure that they don’t indulge in activities which will lead towards misuse of information for their personal gains (Padilla, 2005). Organizations to deal with this has aimed towards using a policy of whistle blowers who aim to support the organization to ensure that such policies where people look at using the insider information is not leaked not misused by the employees. This will act as a framework through which the overall development and better returns for the stakeholders can be ensured. To deal with the issues government has to take additional role and responsibility of ensuring that the use of insider trading is prohibited. Since, government has a mechanism through which enforcement policies can be enforced over organizations it will help to develop a framework through which better control can be exercised (Beny, 2008). This will help to ensure that employees act morally and don’t indulge in activities which would look towards using the information for their gains. This will bring a complete change and transformation in the manner inside information is used and will help to develop the required dimensions through which better governance will be achieved (Seyhun and Michael, 2007). This will also require that employees on their forefront aim towards being morally correct and develop strategies which will be aimed at improving the overall condition of the stakeholders. The use of insider information by employees based on their position in the organization will result in raising the cost of capital by reducing the liquidity in the market and increase the concentration level with regard to ownership. This is because of the fact that people providing or using the inside information might look at using the information at might look to charge some additional price (Beny, 2007). This will tend to reduce the level of investment and will thereby have an impact on the liquidity. This thereby requires that the overall framework has to be developed in such a manner that the government looks towards enforcement policies and the employees act morally. Further, the use of insider information is immoral and incorrect because the employees use their position for their gains. This is incorrect as the different stakeholders who have invested their time and money in the organization needs to look at differently. The employees are already compensated for their services through the process of salaries and incentives and need to thereby act towards the interest of the stakeholders. This will require that the employees remain morally correct and follow the ethical code of conduct which has been developed. The employees need to aim at being ethically correct and should be aimed towards maximizing the overall gains for the stakeholders (Beny, 2005). The employees have a role of carrying out the different roles and responsibilities in the most effective manner. This will require that the different dimensions through which different aspect of insider trading are avoided. This is further matched by the fact that employees should further remain morally correct and should not indulge in activities which results in the use of insider information to their advantage (Bris, 2000). This could have a negative impact on the long term prospect of the organization and will create doubts in the mind of the people regarding the corporate governance policies which have been adopted by the organization. The overall framework has to be such that insider trading needs to be prohibited and employees should look towards being remaining ethical. The employees should ensure that no insider information is either leaked or misused by people at different positions as it can have a long term impact on the growth of the organization. Developing and enforcing different rules through the policy of whistle blower will help to bring a check in insider trading and will also ensure that people act morally. This has to be supported by increased role of the government as the government can develop and use different enforcement tools which will bring better control and help to ensure that the different information is used in the correct manner. To deal with the issue organizations have adopted a policy of whistle blowers which looks towards bringing forward the different issues related to insider information. This helps the management to come forward towards the different issues which is being felt by the business and helps to identify the factor through which such insider trading can be restricted. Thus the overall process will be aimed at reducing the level of level of insider information ensuring that employees act in a morally correct way so that the stakeholders on the whole benefits and are able to ensure better growth for the organization and the stakeholders. References Beny, L. N. 2005. Do Insider Trading Laws Matter? Some Preliminary Comparative Evidence. American Law & Economics Review 7, 1, 144–183 Beny, L. N. 2007. Insider Trading Rules Can Affect Attractiveness of Countries’ Stock Markets. Law Quadrangle Notes 50, 1, 73–75 Beny, L. N. 2008. Do Investors in Controlled Firms Value Insider Trading Laws? International Evidence. Journal of Law, Economics, & Policy 4, 2, 267–310 Bris, A. 2000. Do Insider Trading Laws Work? Yale ICF Working Paper No. 00–19, 2, 4. Padilla, A. 2005. Can Regulation Eliminate the Agency Problems Posed by Insider Trading? Commentaries on Law & Economics, 2, 47–81. Padilla, A. 2007. Can Regulation of Insider Trading Be Effective? In C. Vidya, Insider Trading: Regulatory Perspectives, Hyberabad, India: The Icfai University Press: 75–109 Shin, J. 2000. The Optimal Regulation of Insider Trading. Journal of Financial Intermediation 5, no. 1 (January): 49–73. Strasburg, J. and Chad, B. 2009. Six Charged in Vast Insider-Trading Ring, Wall Street Journal, October 17, 2009 Seyhun, H. and Michael B. 2007. Corporate Bankruptcy and Insider Trading. Journal of Business, 70 (2), 189–216 Viday, C. 2007. Insider Trading: Regulatory Perspectives, Hyberabad, India: The Icfai University Press Read More