Ethical Reasoning and the Use of Insider Information in Stock Trading

The cognitive developmental theory of ethics suggests that there is a positive relationship between ethical reasoning and ethical behavior. In this study, we trained a sample of accounting and finance students in performing competitive stock trading in our state-of-the-art trading room. The subjects then performed trading of stocks under two experimental conditions: insider information, and no-insider information where significant performance-based financial awards were at stake. We also administered the Defining Issues Test (DIT). Ethical behavior, as the dependent variable was measured in a binary scale: whether the subjects used insider information for trading of stocks or not. Ethical reasoning as measured by the DIT P-score indicated statistically significant effect on ethical behavior. The results have important implications for recruitment and training of professionals engaged in the use of financial markets for securities trading.     

Where Should the Line Be Drawn on Insider Trading Ethics?

Finance ethics have drawn increasing attention from both government regulators and academic researchers. This paper addresses the issue of insider trading ethics. Previous studies on insider trading ethics have failed to provide convincing arguments and consistent results. In particular, the arguments against insider trading are based primarily on moral and philosophical grounds and lack empirical rigor. This study intends to establish and examine the relationship between the ethical issue and economic issue of insider trading. We argue that the ethics of insider trading is in essence an economic rather than a moral issue. It is so far not clear to what extent insider trading may increase or decrease shareholders wealth. Until then, we must take care to avoid over-regulating insider trading.     

Applying Ethics to Insider Trading

Insider trading has received a bad name in recent decades. The popular press makes it sound like an evil practice where those who engage in it are totally devoid of ethical principles. Yet not all insider trading is unethical and some studies have concluded that certain kinds of insider trading are actually beneficial to the greater investment community. Some scholars in philosophy, law and economics have disputed whether insider trading should be punished at all while others assert that it should be illegal in all cases. This paper explores the nature of insider trading and analyzes the issues to determine the positive and negative aspects of insider trading, and how policy should be changed. The best hope would be for studies to be made that isolate the individuals or groups who are fraudulently harmed by insider trading. If any such groups exist, then clearly worded legislation could be passed to prevent any fraud from being committed against these individuals and groups, while allowing non-fraudulent transactions to be completed without fear of prosecution. Until it can be clearly determined that someone is fraudulently harmed by insider trading, there should be no law or regulation restricting the practice, since such restrictions violate individual rights and will likely have a negative market reaction. Robert W. McGee is a professor at the Andreas School of Business, Barry University in Miami, Florida, USA. He has published more than 50 books and more than 400 scholarly papers in the fields of accounting, taxation, economics, law, philosophy and ethics. He holds doctorates in several fields, including accounting, economics, law and philosophy. He is an attorney and a certified public accountant (CPA).     

The Communication Contract and Its Ten Ground Clauses

Global society issues are putting increasing pressure on both small and large organizations to communicate ethically at all levels. Achieving this requires social skills beyond the choice of language or vocabulary and relies above all on individual social responsibility. Arguments from social contract philosophy and speech act theory lead to consider a communication contract that identifies the necessary individual skills for ethical communication on the basis of a limited number of explicit clauses. These latter are pragmatically binding for all partners involved and help to ensure that the ground rules of cooperative communication are observed within a group or an organization. Beyond promoting ethical communication, the communication contract clarifies how individual discursive behaviour can be constructively and ethically monitored by group leaders in business meetings. A case study which shows what may happen when ground clauses of ethical communication are violated is presented. The conclusions of the study highlights why attempting to respect the communication contract is in the best interest of all partners at all levels within any group or organization.     

Innovation and Ethics Ethical Considerations in the Innovation Business

In our global economy knowledge-based industry is takingmore importance. Recent years have seen the success of anincreasing number of start-up companies, most technology-basedenterprises financed by private persons or companies, or through venture capital funds and public offering. In manyyears, those companies are faced at certain critical momentswith matters involving intellectual property rights, insiderinformation and raising money. These facts all have an ethicaldimension. There is an increasing need for ethical behaviourfrom all parties involved. A code of conduct of all partiesshould be applied. This paper describes the growth processof a company and the valuation of an innovation project. Itwill overview a number of ethical issues, at different stagesin the innovation business, and in the lifetime of a start-upcompany, such as the problems of intellectual property, theconfidentiality of information, the negotiation processbetween the entrepreneur and the financier, the marketingof raising funds and of an IPO, and finally the informationand insider trading. The paper concludes with aplea for increased ethical ethical behaviour and the needfor rules of best practice for all parties: the inventor,the entrepreneur, the financial investor, and other stakeholders.     

Approaches to organisational culture and ethics

This paper assesses the potential of organisational culture as a means for improving ethics in organisations. Organisational culture is recognised as one determinant of how people behave, more or less ethically, in organisations. It is also incresingly understood as an attribute that management can and should influence to improve organisational performance. When things go wrong in organisations, managers look to the culture as both the source of problems and the basis for solutions. Two models of organisational culture and ethical behaviour are evaluated. They rest on different understandings of organisational culture and the processes by which ethics are enhanced. Firstly, the prevailing approach holds that creating a unitary cohesive culture around core moral values is the solution to enhancing ethical behaviour. Both the feasibility and desirability of this approach, in terms of ethical outcomes, is questioned. The second model queries the existence of organisational culture at all, arguing that organisations are nothing more than shifting coalitions of subcultures. In this second model, the very porousness of the subcultures provides a catalyst for the scrutiny and critique of norms and practices. Such diversity and debate is construed as potentially a better safeguard for ethical behaviour than the uniformity promised by the unitary, strong culture model.Dr. Amanda Sinclair is a Senior Lecturer in the Graduate School of Management. As a teacher on the MBA program of courses, including Ethics, she has a particular interest in the development and professionalisation of managers. Her current research focuses on organisational diversity, change and culture and administrative leadership and accountability.     

What is really unethical about insider trading?

Insider trading is illegal, and is widely believed to be unethical. It has received widespread attention in the media and has become, for some, the very symbol of ethical decay in business. For a practice that has come to epitomize unethical business behavior, however, insider trading has received surprisingly little ethical analysis. This article critically examines the principal ethical arguments against insider trading: the claim that the practice is unfair, the claim that it involves a misappropriation of information and the claim that it harms ordinary investors and the market as a whole. The author concludes that each of these arguments has some serious deficiencies; no one of them by itself provides a sufficient reason for outlawing insider trading. This does not mean, however, that there are no reasons for prohibiting the practice. The author argues that the real reason for outlawing insider trading is that it undermines the fiduciary relationship that lies at the heart of American business. Jennifer Moore is an Assistant Professor in the Department of Philosophy and the Department of Business Administration at the University of Delaware. She teaches and does research in the areas of business ethics and business law. She is the author of several articles in business ethics and co-editor of the anthology, Business Ethics: Readings and Cases in Corporate Morality, published by McGraw-Hill.     

Late Disclosure of Insider Trades: Who Does It and Why?

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.     

Recent SEC prosecution and insider trading on forthcoming merger announcements

While trading on nonpublic information is illegal, the enforcement of this law has been elusive, particularly in the area of trading in advance of merger announcements. We examine the impact of insider trading on daily stock price changes for firms identified by the SEC in the Antoniu-Newman insider trading case. Using residual analysis, the abnormal returns occuring prior to the announcement are calculated and compared with a sample of 188 typical merger candidates not identified in the Antoniu-Newman case to determine whether or not there was an unusually large market reaction prior to the forthcoming merger announcement on the subset of merger candidates involved in the court procedure.     

News media and insider trading profitability: An emerging country perspective

We test news media's disciplining by dissemination role and predictive power in insider trading related issues with a large and novel dataset on Chinese firms between 2008 and 2017. We find that more media coverage is associated with significantly lower level of insider trading profitability, which confirms the disciplining by dissemination role of media documented in the developed market. However, as a new evidence to the media and insider trading literature, we also find that media's negative tone has a positive correlation with future insider trading profitability, which is consistent with the media predictive power argument. In addition, we find that media's predictive power is amplified by a firm's good governance structure and low level of information asymmetry. Our study shows news media's effectiveness in predicting opportunistic insider trading in China.     

Insider trading laws and price informativeness in emerging stock markets: The South African case

We test the view that insider trading deters informativeness and, thereby, provide empirical evidence on the ramifications of insider trading legislation, particularly in an emerging market, that has hitherto received no research attention. Using the difference-in-differences identification strategy, we find that “effective insider trading law” improves stock price informativeness, a reflection of market efficiency, and that this efficiency is robust to both economic factors that affect market efficiency and the choice of control. Importantly, our results support the hypothesis that prohibition of insider trading elicits efficiency enhancement, particularly in emerging markets which are often characterized by weaker requisite institutional infrastructure than developed markets.     

The Question of Ethical Hypocrisy in Human Resource Management in the U.K. and Irish Charity Sectors

Whilst there is a growing volume of literature exploring the ethical implications of organisational change for HRM and the ethical aspects of certain HRM activities, there have been few published U.K. studies of how HR managers actually behave when faced with ethical dilemmas in their work. This paper seeks to enhance the foundations of such knowledge through an examination of the influence of organisational values on the ethical behaviour of Human Resource Managers within a sample of charities in the U.K. and the Republic of Ireland. A qualitative research design is adopted utilising semi-structured interviews. Findings highlight ethical inconsistency in people management in the charity sector arising from the clear application of strong and explicit organisational values to external client groups but their limited influence on people management strategies and practices within the organisation. Many of the ethical issues faced by HRM professionals in both countries arise from this inconsistency. In their handling of ethical dilemmas, the HRM professionals exhibit a combination of a care ethic and a concern for justice but it is also clear that in situations of management intransigence, a desire to be conscience driven often gives way to a contingent approach. Whilst respondents considered it inappropriate for the HRM function to be the conscience of the organisation, it is seen to have a key role in providing management with advice on ethical action. However, the ability of HRM to influence ethical behaviour is highly dependent on the status of the function within the organisation.     

The Economics of Insider Trading: A Free Market Perspective

We deny that asymmetrical information is a market failure. In order to make this case, we subject to critical scrutiny the strongest case for this thesis: the view that laws prohibiting insider trading are viable, necessary, or compatible with the rule of law.     

Insider Trading 2.0? The Ethics of Information Sales

The sale of faster access to financial market data has recently generated public controversy. NY Attorney General Eric Schneiderman has referred to such fast data feeds as “Insider Trading 2.0”. For example, Thomson Reuters sold the University of Michigan’s Consumer Sentiment Index to computerized trading firms 2 seconds before releasing its data to its other paying clients. This paper explores the ethical issues involved in the sale of such information. Is selling faster access ethically the same as traditional insider trading, which generally involves a breach of fiduciary duty or the use of misappropriated information? Such practices are extremely different from traditional insider trading as there is neither a breach of fiduciary duty nor misappropriation of inside information. The ethical issues are similar to other market segmentation and price discrimination issues, in which different prices are charged to different customers. The ability to price discriminate across segments can actually benefit large segments of the population who may receive lower prices because others, such as the high-speed traders, are paying more. The sale of faster access to information, especially by exchanges, raises additional ethical issues. There may be adverse effects on market quality that must be addressed. The moral distaste for the practice expressed by some stems from the seeming unfairness of a modern market structure that provides advantages to a small group of computerized traders.     

Corporate governance and insider trading regulation efficiency

This paper aims to measure insider trading probability and the corresponding regulation efficiency in China. Based on an identification of influencing factors of corporate governance, the author explores the relationship among insider trading, corporate governance, and corporate value. The author also uses, based on high-frequency financial data, the probability of insider trading to measure the degree of insider trading in China’s security market. Results reveal that China’s security market has failed to punish and prohibit illegal insider trading effectively. However, the security market does exert certain constraints on insider-trading-ridden listed companies. The conclusion of this article is that by improving corporate governance, we can enhance the efficiency of insider trading regulation. Practical implications are also discussed.     

The impact of the work environment on ethical decision making: Some Australian evidence

Business ethics has emerged in recent years as a field of significant scholarly endeavour. Particularly well documented is the existence of ethical conflict at work and the reported inseparability of business decisions and moral consequences. However, to date, the majority of studies have been conducted in the American business context.This paper examines the concept of ethical conflict as experienced by employees in the Australian context. According to a sample of Western Australian managers, ethical conflicts at work do occur — with relative frequency. Of considerable concern is the high incidence of cases where the demands of superiors are deemed to be the cause of this conflict. This finding is particularly disturbing as superiors are also the primary influence on employee ethical decision making. It would see that the ethics role models are also the instigators of unethical behaviour.This research has confirmed in the Western Australian context that the values of top management do have significant impact on the ethical choices made by employees. The management of organisational culture, therefore, is a key to raising ethical standards in business. The institutionalisation of ethics by such formal means as codes of ethics is a necessary, but insufficient, condition of ensuring ethical behaviour in organisations. Management of the informal climate is pivotal to the achievement of ethical organisational behaviour.Geoffrey Soutar is Professor of Management at Curtin University of Technology. He has particular interests in marketing and, in recent times, in the marketing of services. He has published widely across a number of management areas and has acted as consultant for both private and public sector organisations as well as for a number of unions.Margaret McNeil is a Lecturer in the School of Management at Curtin University of Technology. Her research interests include corporate innovation and financial services marketing. Consultancy has been in the areas of financial services, professional services and non-profit organisations.Caron Molster is a Research Assistant in the School of Management at Curtin University of Technology. She has a research interest in the area of ethics, having completed her thesis on this topic.     

Predictors of ethical decisions regarding insider trading

This paper examines potential predictors of ethical decisions regarding insider trading. An interactionist perspective is taken, in which person variables, situational variables, and the interaction of these two sets of variables are viewed as influencing ethical decisions. The results of our study support such a perspective. Ethical decisions regarding insider trading appear to be a function of a complex set of interacting variables related to both the person and the situation. The implications of these findings are discussed.David E. Terpstra is Hearin-Hess Professor of Management at the University of Mississippi. A frequent contributor to management and psychological journals, his current research interests involve business ethics, sexual harassment, and human resource management issues.Mario G. C. Reyes is an Assistant Professor of Finance at the University of Idaho. His research and publications have been primarily in the areas of market efficiency, portfolio management, and financial econometrics. He has participated in the Authur Anderson & Co. Conference on Teaching Business Ethics.Donald W. Bokor's research interests are in the domain of organizational structure and development with implications on human behavior and strategic management.     

An Exploration of Factors Affecting Work Anomia

Anomie, a societal and anomia an individual characteristic is employed to understand the behaviour of people and more recently it has been used to explore and understand the moral behaviour of people at work. This article reports on research undertaken to explore the relationship between organisational interest, ethical ideologies, employment, religion and ethnic origin on work and nonwork anomia. An objective of this research was to ascertain whether participants that were not employed had lower levels of work-related anomia than those that were employed. The sample consisted of students (N = 209) enroled in management degrees in a UK university. Results indicate that overall work anomia was statistically significant higher than nonwork anomia. Employment status had a significant effect on levels of nonwork anomia. Religion and ethnic origin were also found to have a significant effect on anomia levels. The findings indicate that the work context may be perceived as inherently anomic and this perception is then adjusted according to the actual experience at work. This may influence ethical behaviour and explain the ethical regression that is identified in the work context.     

Ethnic Marketing Ethics

Culture plays an important role in defining ethics standards because dissimilar cultures socialize their people differently, according to what is acceptable behaviour. The potential significance of ethnic groups for marketing justifies inquiry into the moral judgments, standards, and rules of conduct exercised in marketing decisions and situations arising from decisions whether or not to focus on individual ethnic groups within an economy. Identifying and targeting ethnic groups for marketing purposes are tasks fraught with many ethical difficulties. In a multicultural society consisting of a dominant group and many diverse, minority groups defined by ethnicity, these problems can be expected to increase substantially. Consequently, marketers may include minority ethnic consumers in their mainstream marketing programs. In itself, this has ethical consequences. Alternatively, if marketers seek to target individual minority ethnic groups within the same economy a further set of ethical consequences needs to be considered. This paper reviews the concepts of ethnicity and ethnic groups and their relevance for marketing strategy within an economy where there is a dominant group and also significant minority ethnic groups. The ethical consequences for minority communities arising from the use of non-ethnic, mainstream marketing programs are examined. An alternative approach, ethnic marketing, is also examined and its ethical consequences in terms of other groups within the one country appraised. The ethical dilemma and tradeoffs facing marketers within advanced, culturally diverse countries are then considered.