Wednesday, September 23, 2020
This is the fourth installment of a multi-part guest blog presenting some of the results of the first comprehensive, large-scale, national survey of public attitudes regarding insider trading. My co-authors (Jeremy Kidd and George Mocsary) and I present the survey’s complete results in our forthcoming article, Public Perceptions of Insider Trading. This installment focuses on the public’s views concerning the ethics of insider trading in different factual scenarios.
The survey presented each respondent with five basic insider-trading scenarios. In each scenario, the inside information pertained to the acquisition of a small company by a larger company. Respondents were placed in the shoes of (1) the CEO of the small firm being acquired by the larger firm; (2) a janitorial employee of the small firm; (3) an outside accountant hired to audit the small firm; (4) the friend of a middle manager of the small firm who learns the inside information at a holiday party; and (5) a stranger who overhears the material nonpublic information in an elevator. The survey instrument randomly directed respondents down multiple question paths for each of these scenarios. I will summarize just some of the results for the CEO scenario in this post, but see here for the complete results.
When asked whether it would be ethical for the CEO of the smaller company to trade in her own company’s shares based on material nonpublic information of the imminent acquisition, 37% said yes. That number increased to 50%, however, when respondents were asked if it would be ethical for the CEO to trade in the larger, acquiring company based on the same information. The 13-point difference may be explained by the fact that the CEO's trading in her own company implicates both the classical and misappropriation prohibitions for insider trading under our current enforcement regime, while trading in the other firm's shares would only implicate the misappropriation theory. Under the classical theory, the harm of insider trading is said to stem from a breach by the insider of a duty to disclose to her company's current or prospective shareholders on the other side of the trade (so this theory would not apply to the trade in the other, large company's shares). Under the misappropriation theory, the harm of insider trading is located in a breach of duty to the source of the information (so in both scenarios the source is the same). The difference in responses therefore suggests there are some respondents whose intuitions align with either the classical theory or the misappropriation theory, but not both. If all respondents found the classical and misappropriation theories equally compelling, we would not expect a difference.
After providing their initial answers to these scenario-based questions, respondents were then presented with a short piece of propaganda about insider trading. They were offered a statement suggesting either that insider trading has positive, negative, or neutral consequences for markets. The propaganda had a surprising impact. For instance, respondents were much more willing (by a margin of 9%) to condone the CEO’s trading in his own company’s shares (46%) after having been presented with the short propaganda piece. These results suggest that the public’s ethical views concerning even the most straightforward insider-trading scenarios under our current enforcement regime are neither clear nor firm.
(Modified on 9/24/20 at 11:30 am CST)