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INEFFICIENCY, IMMORALITY AND INSIDER TRADING: A REPLY TO MY CRITICS
Critical Perspectives on Accounting (2000) 11, 123]128 doi:10.1006/ cpac.1999.0374 Available online at http://www.idealibrary.com on
INEFFICIENCY, IMMORALITY AND INSIDER TRADING: A REPLY TO MY CRITICS MICHAEL G. KEENAN Department of Accounting and Finance, University of Auckland, Private Bag 92019, Auckland, New Zealand Williams (2000) notes that Manne’s (1966, 1970) arguments in defence of insider trading were put some three decades ago, and claims that Keenan’s (2000) attention to those arguments after such an interval is symptomatic of a problem in academic accounting research. The problem is ‘‘accounting’s subsumption into economics...’’, and the alleged fact that ‘‘...the ideology of [the Chicago school of] economics constitutes the bonds of persuasion and argument for the accounting academy’’ (Williams 2000, p. 112). A declared aim of Williams’ (2000) comments is to ‘‘...use Keenan’s (2000) paper to illustrate the exceedingly confining nature of contemporary academic accounting discourse’’ (Williams 2000, p. 112). However, framing the debate joined in Keenan’s (2000) essay in this way obscures both the wider context of the debate and the rationale for the essay. Manne’s academic discipline is the law, not economics or accounting, and during the last three decades his arguments in defence of insider trading (and arguments like them put by others) have gained a grip in areas far removed from academic accounting research, e.g. in political economy, and in the ideology of the New Right. The persistence of this grip is illustrated by Ronen’s (2000) comments on Keenan’s (2000) essay for those comments share with Manne’s arguments the same antipathy towards external regulation of insider trading, the same ethical nihilism on the morality of the practice, and the same confusions over notions of market efficiency. The rationale for addressing these issues in Keenan (2000) is to undo the typical strategies which apologists for insider trading adopt for resolving the dilemma created by their opposition to the external regulation of an immoral practice. One of the strategies is to allow that the practice is immoral, but argue that any dilemma which may arise from leaving it unregulated can be resolved by trading off the consequent immorality against social benefits, such as increased market efficiency, which will follow from the practice remaining unregulated. Another strategy is simply to deny the immorality of the practice and, consequently, to deny that any dilemma is created by leaving the practice unregulated. These strategies can be undone with arguments which show, in the first case, that the other social benefits claimed do not follow from the practice remaining unregulated (so there can be no trade-off of the sort suggested) and, in the second case, that the practice is immoral. These 123 1045-2354/ 00 / 010123+ 06 $35.00 / 0
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arguments are set out, respectively, in Sections 1 and 2 of the essay. (The arguments in Section 3 provide a feasibility check on the external regulation of insider trading by showing that at least one form of such regulation can be effective.) Market Efficiency Ronen’s (2000) comments on Keenan’s (2000) essay also share with Manne’s arguments a reliance on rhetoric, rather than valid reasoning, for persuasive effect. Some examples of this defect occur in Ronen’s discussion of market efficiency where different definitions of that notoriously ambiguous notion are manipulated to score mere debating points rather than to establish relevant points of substance. For instance, considering the possibility of mandatory information disclosure, and an alleged need for auditing to ensure truthful disclosure, Ronen claims ‘‘This can involve significant social costs that should be pitted against the increased efficiency resulting from immediate mandatory disclosure relative to the somewhat slower impounding of the information as a result of insider trading. Thus, insider trading could well bring about the incorporation of private information in prices more efficiently than alternative mechanisms. That is, it could do so at lesser social costs’’ (Ronen 2000, p. 98). Here, Ronen (2000) attempts to obscure the point that the slower impounding of information in prices by insider trading reduces the informational efficiency of markets (which is the relevant sense, and one of the more clearly defined senses, of ‘‘market efficiency’’) by appealing to some conveniently vague notion of cost efficiency involving unspecified ‘social’ costs. Another example of Ronen’s (2000) rhetoric is his attempt to conflate the different notions of allocative and informational market efficiency in his criticism of Keenan’s (2000, para. 1.31) position on the period of time which is relevant for assessing the speed of adjustment of market prices to new information, i.e. the period between the information being released to the market, however that release may be effected, and the striking of a new equilibrium price which impounds the information. Ronen (2000, p. 99) claims that ‘‘...for a definition of informational efficiency that is more consistent with allocative efficiency, it behooves us to consider the total time lapse between the point of information discovery and the point at which prices reflect the information’’; an alleged reason being that ‘‘...any delay in the time it takes for prices to reflect the content of relevant information lengthens the time interval during which prices do not serve as proper signals for capital allocations’’ (Ronen 2000, loc. cit., added italics). The claim is overstated with use of the quantifier ‘‘any’’, and misses the point, stated in Keenan (2000, para 1.31), that questions of how quickly (or slowly) a market impounds relevant information in prices presuppose that the information has been made available to the market by some means. Prices can hardly be expected to adjust to information which the market does not have. So periods during which price-relevant information is withheld
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from a market are not relevant to assessments of its informational efficiency. Walker (2000) also deploys the distinction between informational and allocative efficiency, and asserts that it ‘‘...deprives Keenan’s efficiency argument against insider trading of much of its force.... Keenan simply demonstrates that tolerance of insider trading causes share prices to respond less quickly to private information. Keenan does not explain why, on allocative efficiency grounds, anyone should be troubled by such outcomes’’ (Walker, 2000, p. 105). This rhetorical flourish ignores the point that the specific concepts of informational and allocative efficiency are either logically independent of each other or not. If they are not, as may be expected if they are components of some internally consistent, general concept of market efficiency, then reduced informational efficiency of markets reduces, or impedes, their allocative efficiency. In that case, arguments showing that insider trading decreases the informational efficiency of markets do not need to be augmented by other arguments to show, in Walker’s (2000, loc. cit.) words, ‘‘ that insider trading leads to allocative (i.e. Pareto) inefficient outcomes’’. If, however, the concepts of informational and allocative efficiency are logically independent of each other, then a preference for the former concept as context for arguments to show that insider trading decreases market efficieny is supported by the reasons set out in Keenan (2000, paras. 1.1]1.11). The a priori argument for that conclusion (Keenan, 2000, paras. 1.2]1.23) compares the speed of adjustment of prices to new information under conditions of information symmetry and insider trading conditions of information asymmetry. Ronen (2000, p. 97) agrees with the conclusion of the argument that prices adjust to new information more quickly under the former conditions than under the latter conditions, but denies that the comparison is valid for establishing that insider trading decreases market efficiency. However, rather than giving reasons for this denial, Ronen merely repeats it several times in the same paragraph: ‘‘...the two scenarios are not comparable.... an economy wherein all information is common knowledge is not the proper benchmark.... an economy with no private information (an economy of information symmetry) is of no relevance to this question’’ (Ronen, 2000, pp. 97, 98). Notwithstanding Ronen’s rhetorical denials, the comparison gains its validity from the wider context of the discussion of external regulation of insider trading, and the implications of different forms of such regulation for information disclosure. Whether the requirement of insider trading regulation for disclosure of price relevant information is unconditional, or conditional upon trading, its effect is to reduce information asymmetries among investors and create conditions more akin to market information symmetry. That is why the comparison of market efficiency under conditions of information symmetry and insider trading conditions of information asymmetry is valid. Further on, Ronen dwells on arguments in Keenan (2000, paras. 1.3]1.33) which expose confusions in Manne’s (1970) arguments for the conclusion that insider trading increases market efficiency. Manne’s (1970)
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confusions are over assessments of the speed of adjustment of prices to new information. Ronen supports Manne in these confusions, and concludes ‘‘ that the distinction that Keenan makes between the slow versus fast and early versus late is of no relevance’’ (Ronen, 2000, p. 99). However, Williams (2000, p. 113) allows that Manne’s conclusion is ‘‘ingeniously faulted’’ by this distinction, and Walker (2000, p. 106) observes, ’’... commentators on insider trading have tended to confuse the speed of response issue with the issue of how soon a piece of information enters the market.... Keenan is correct in pointing out that the earliness with which a piece of information enters the market is not the same thing as the speed with which market prices adjust to an item of information‘‘. The a posteriori argument for the conclusion that insider trading decreases market efficiency in Keenan (2000, paras. 1.4]1.43) is based on published results of empirical tests of market efficiency under conditions which include insider trading (strong form tests) and exclude insider trading (semi-strong form tests). The results show that markets are less efficient with insider trading than without it, because higher abnormal returns are able to be earned under strong form test conditions than under semi-strong form test conditions, and hence, that insider trading decreases market efficiency. Ronen’s rejoinder to this argument includes the by now familiar rhetorical denial of relevance: ’’This empirical evidence has no bearing on the issue‘‘ (Ronen, 2000, p. 99). Ronen’s attempt to refute the argument is singularly misdirected. ’’The fact that insider trading is (and was during the time period when these studies were conducted) constrained by a variety of insider trading rules and attendant penalties, could itself account for the empirical evidence revealing insider information to be associated with abnormal returns‘‘ (Ronen, 2000, loc. cit.). But the fact that insider trading was subject to external regulation during the test period creates a bias in the results against the association of insider trading and abnormal returns. Had insider trading not been subject to regulation during the test period, it is likely that it would have been more prevalent, and associated with higher abnormal returns, indicating a greater reduction in market efficiency. Business Ethics As already noted, Ronen (2000) shares Manne’s (1967, 1970, 1987) ethical nihilism on questions of the morality of insider trading. ’’To sum, I am neither convinced as to the necessity of morality as an absolute criterion for the desirability of insider trading, nor am I persuaded that the respect for autonomy is the proper criterion to apply to judge the morality of insider trading‘‘ (Ronen, 2000, p. 101). For Ronen, there is a trade-off between efficiency and morality which is made in the political arena. ‘‘In the absence of a well-defined social welfare function, trade-offs among different social values (such as efficiency and morality) are typically settled in democratic regimes through some voting mechanism’’ (Ronen 2000, p. 100). The most charitable interpretation that can be
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placed on these quoted remarks is that Ronen has confused issues of morality with issues of the enforcement of morality. It can be agreed that the latter involve trade-offs of costs and benefits, and are resolved in the political domain (Keenan, 2000, para. 3.13). But if it really is Ronen’s view that issues of morality involve trade-offs with different social values such as efficiency, and are typically settled in democratic regimes through voting mechanisms, then it is well to consider some of the consequences of that view. For instance, genocide sanctioned by a democratic majority is morally acceptable so long as it is efficient. A confusion of issues of morality with issues of the enforcement of morality is clearly evident in Ronen’s (2000, p. 101) defence of Manne’s (1987, p. 322) position, endorsed by Barry (1991, p. 59), that ‘‘ the moral argument‘‘ against insider trading is invalid because some (alleged) forms of the practice cannot be policed. The alleged forms of insider trading involve benefiting from private price-relevant information by refraining from trading on it until the information has been made public and prices have reacted to it, e.g. deferring a sale (purchase) on good (bad) news. Ronen (2000, p. 100) finds ’’unhelpful‘‘ the distinction between trading and refraining from trading drawn in Keenan (2000, para. 2.42) to deny that such behaviour is insider trading} refraining from trading is not trading, so it is not insider trading. Ronen (2000, loc. cit.) also suggests that Keenan (2000) overlooks investors who benefit from private price-relevant information in this way, and poses the question, which must surely be rhetorical, ’’Is this non-disclosure any less immoral than actively trading on inside information?‘‘ An argument focussing on just such behaviour, and denying that it is immoral, is set out in Keenan (2000, para. 2.43). Comments by all three commentators betray a shared misunderstanding that Keenan’s (2000) argument that insider trading is an immoral practice is an argument by analogy with rights and duties of disclosure for informed consent in the context of medical ethics. As stated in Keenan (2000, para. 2.2), the argument draws out the implications which the principle of respect for individual autonomy has for the actions of asymmetrically informed parties to an exchange of some good or service for consideration. Parallel arguments of this kind can be made in different contexts of business and professional ethics, but an argument made in one of those contexts (say, business ethics) does not depend, logically, on the argument made in the other context (medical ethics) as is the case for arguments by analogy. The purpose of including an example of the argument in the context of medical ethics in Keenan (2000, para. 2.21) was to facilitate an understanding of the logical relations between the principle of respect for individual autonomy and the rights and duties of disclosure for informed consent derived from that principle (which are crucial to the argument) by demonstrating them first in a context which was, presumably, more familiar to the reader. The argument could be restated without any reference to the context of medical ethics, and without any loss of validity. Thus, objections to the argument by Ronen (2000, p. 100) and Walker (2000, p. 108) which seek to establish counter-analogies are misdirected, and can be dismissed in
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the ways that similar objections, now revealed to be by Williams (2000, p. 113), were dismissed in Keenan (2000, paras. 2.3]2.33). External Regulation Both Walker (2000, p. 105) and Williams (2000, p. 114) display some unease at the separation of questions of the effectiveness of regulation and questions of the (effectiveness of) enforcement of regulation in Keenan’s (2000) discussion of external regulation of insider trading. In addition to the reasons given for that separation in Keenan (2000, paras. 3.1]3.13), it can be noted here that economies may be gained in discussions of the effectiveness of the enforcement of different regulatory policies if it can be shown in advance that the effects of some policies, even with costless compliance, are counter-productive. Some policies for the external regulation of insider trading are shown to have such effects in Keenan’s (2000, paras. 3.14]3.44) analysis of three policies against three criteria for effectiveness. The policy which emerges from that analysis satisfying all three criteria is one requiring information disclosure conditional upon trading} the ’’disclose or abstain‘‘ rule. Ronen (2000, p. 102) objects that ’’...this [rule] would detract from efficiency .... [because].... if the information is neither disclosed nor traded upon, as would be consistent with the rule, the information would not be reflected in prices until becoming publicly transparent‘‘. This objection repeats Ronen’s confusion of the early/ late and quick/ slow dimensions for the timing of price adjustments to new information. Ronen (2000) also criticizes Keenan’s (2000, para. 3.43) argument that this rule does not depress incentives for a firm to generate price relevant information. Ronen’s (2000, p. 102) critical point is that ’’...all non-disclosures would be identified with the possession of negative information, and securities prices would reflect the implications of the negative information‘‘. The criticism assumes, somewhat implausibly, that market analysts, and others, are unable to differentiate non-disclosure of information when there is no relevant information to disclose from non-disclosure of relevant negative information.
References Barry, N., ’’The Ethics of Insider Trading‘‘, Policy, Spring, 1991, pp. 57]60 Keenan, M. G., ’’Insider Trading, Market Efficiency, Business Ethics and External Regulation‘‘, Critical Perspectives on Accounting, 2000, 11, 71]96. Manne, H. G., Insider Trading and the Stock Market, New York: The Free Press, 1966. Manne, H. G., ’’Insider Trading and the Law Professors‘‘, Vanderbilt Law Review, 1970, pp. 547]590. Manne, H. G., ’’Insider Trading and Property Rights in New Information‘‘ in J. Dorn, & H. G. Manne (eds) Economic Liberties and the Judiciary, Fairfax: George Mason University Press, 1987, pp. 317]329. Ronen, J., ‘‘Insider Trading Regulation in an Efficient Market: A Contradiction’’ Critical Perspectives on Accounting, 2000, 11, 97]103. Walker, M., ’’Commentary on ‘Insider Trading, Market Efficiency, Business Ethics and External Regulation’ ’’, Critical Perspectives on Accounting, 2000, 11, 105]110. Williams, P. F., ’’Loosening the Bonds: A Comment on ‘Insider Trading, Market Efficiency, Business Ethics and External Regulation’ ’’, Critical Perspectives on Accounting, 2000, 11, 111]121.
INEFFICIENCY, IMMORALITY AND INSIDER TRADING: A REPLY TO MY CRITICS MICHAEL G. KEENAN Department of Accounting and Finance, University of Auckland, Private Bag 92019, Auckland, New Zealand Williams (2000) notes that Manne’s (1966, 1970) arguments in defence of insider trading were put some three decades ago, and claims that Keenan’s (2000) attention to those arguments after such an interval is symptomatic of a problem in academic accounting research. The problem is ‘‘accounting’s subsumption into economics...’’, and the alleged fact that ‘‘...the ideology of [the Chicago school of] economics constitutes the bonds of persuasion and argument for the accounting academy’’ (Williams 2000, p. 112). A declared aim of Williams’ (2000) comments is to ‘‘...use Keenan’s (2000) paper to illustrate the exceedingly confining nature of contemporary academic accounting discourse’’ (Williams 2000, p. 112). However, framing the debate joined in Keenan’s (2000) essay in this way obscures both the wider context of the debate and the rationale for the essay. Manne’s academic discipline is the law, not economics or accounting, and during the last three decades his arguments in defence of insider trading (and arguments like them put by others) have gained a grip in areas far removed from academic accounting research, e.g. in political economy, and in the ideology of the New Right. The persistence of this grip is illustrated by Ronen’s (2000) comments on Keenan’s (2000) essay for those comments share with Manne’s arguments the same antipathy towards external regulation of insider trading, the same ethical nihilism on the morality of the practice, and the same confusions over notions of market efficiency. The rationale for addressing these issues in Keenan (2000) is to undo the typical strategies which apologists for insider trading adopt for resolving the dilemma created by their opposition to the external regulation of an immoral practice. One of the strategies is to allow that the practice is immoral, but argue that any dilemma which may arise from leaving it unregulated can be resolved by trading off the consequent immorality against social benefits, such as increased market efficiency, which will follow from the practice remaining unregulated. Another strategy is simply to deny the immorality of the practice and, consequently, to deny that any dilemma is created by leaving the practice unregulated. These strategies can be undone with arguments which show, in the first case, that the other social benefits claimed do not follow from the practice remaining unregulated (so there can be no trade-off of the sort suggested) and, in the second case, that the practice is immoral. These 123 1045-2354/ 00 / 010123+ 06 $35.00 / 0
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Academic Press
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M. G. Keenan
arguments are set out, respectively, in Sections 1 and 2 of the essay. (The arguments in Section 3 provide a feasibility check on the external regulation of insider trading by showing that at least one form of such regulation can be effective.) Market Efficiency Ronen’s (2000) comments on Keenan’s (2000) essay also share with Manne’s arguments a reliance on rhetoric, rather than valid reasoning, for persuasive effect. Some examples of this defect occur in Ronen’s discussion of market efficiency where different definitions of that notoriously ambiguous notion are manipulated to score mere debating points rather than to establish relevant points of substance. For instance, considering the possibility of mandatory information disclosure, and an alleged need for auditing to ensure truthful disclosure, Ronen claims ‘‘This can involve significant social costs that should be pitted against the increased efficiency resulting from immediate mandatory disclosure relative to the somewhat slower impounding of the information as a result of insider trading. Thus, insider trading could well bring about the incorporation of private information in prices more efficiently than alternative mechanisms. That is, it could do so at lesser social costs’’ (Ronen 2000, p. 98). Here, Ronen (2000) attempts to obscure the point that the slower impounding of information in prices by insider trading reduces the informational efficiency of markets (which is the relevant sense, and one of the more clearly defined senses, of ‘‘market efficiency’’) by appealing to some conveniently vague notion of cost efficiency involving unspecified ‘social’ costs. Another example of Ronen’s (2000) rhetoric is his attempt to conflate the different notions of allocative and informational market efficiency in his criticism of Keenan’s (2000, para. 1.31) position on the period of time which is relevant for assessing the speed of adjustment of market prices to new information, i.e. the period between the information being released to the market, however that release may be effected, and the striking of a new equilibrium price which impounds the information. Ronen (2000, p. 99) claims that ‘‘...for a definition of informational efficiency that is more consistent with allocative efficiency, it behooves us to consider the total time lapse between the point of information discovery and the point at which prices reflect the information’’; an alleged reason being that ‘‘...any delay in the time it takes for prices to reflect the content of relevant information lengthens the time interval during which prices do not serve as proper signals for capital allocations’’ (Ronen 2000, loc. cit., added italics). The claim is overstated with use of the quantifier ‘‘any’’, and misses the point, stated in Keenan (2000, para 1.31), that questions of how quickly (or slowly) a market impounds relevant information in prices presuppose that the information has been made available to the market by some means. Prices can hardly be expected to adjust to information which the market does not have. So periods during which price-relevant information is withheld
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from a market are not relevant to assessments of its informational efficiency. Walker (2000) also deploys the distinction between informational and allocative efficiency, and asserts that it ‘‘...deprives Keenan’s efficiency argument against insider trading of much of its force.... Keenan simply demonstrates that tolerance of insider trading causes share prices to respond less quickly to private information. Keenan does not explain why, on allocative efficiency grounds, anyone should be troubled by such outcomes’’ (Walker, 2000, p. 105). This rhetorical flourish ignores the point that the specific concepts of informational and allocative efficiency are either logically independent of each other or not. If they are not, as may be expected if they are components of some internally consistent, general concept of market efficiency, then reduced informational efficiency of markets reduces, or impedes, their allocative efficiency. In that case, arguments showing that insider trading decreases the informational efficiency of markets do not need to be augmented by other arguments to show, in Walker’s (2000, loc. cit.) words, ‘‘ that insider trading leads to allocative (i.e. Pareto) inefficient outcomes’’. If, however, the concepts of informational and allocative efficiency are logically independent of each other, then a preference for the former concept as context for arguments to show that insider trading decreases market efficieny is supported by the reasons set out in Keenan (2000, paras. 1.1]1.11). The a priori argument for that conclusion (Keenan, 2000, paras. 1.2]1.23) compares the speed of adjustment of prices to new information under conditions of information symmetry and insider trading conditions of information asymmetry. Ronen (2000, p. 97) agrees with the conclusion of the argument that prices adjust to new information more quickly under the former conditions than under the latter conditions, but denies that the comparison is valid for establishing that insider trading decreases market efficiency. However, rather than giving reasons for this denial, Ronen merely repeats it several times in the same paragraph: ‘‘...the two scenarios are not comparable.... an economy wherein all information is common knowledge is not the proper benchmark.... an economy with no private information (an economy of information symmetry) is of no relevance to this question’’ (Ronen, 2000, pp. 97, 98). Notwithstanding Ronen’s rhetorical denials, the comparison gains its validity from the wider context of the discussion of external regulation of insider trading, and the implications of different forms of such regulation for information disclosure. Whether the requirement of insider trading regulation for disclosure of price relevant information is unconditional, or conditional upon trading, its effect is to reduce information asymmetries among investors and create conditions more akin to market information symmetry. That is why the comparison of market efficiency under conditions of information symmetry and insider trading conditions of information asymmetry is valid. Further on, Ronen dwells on arguments in Keenan (2000, paras. 1.3]1.33) which expose confusions in Manne’s (1970) arguments for the conclusion that insider trading increases market efficiency. Manne’s (1970)
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confusions are over assessments of the speed of adjustment of prices to new information. Ronen supports Manne in these confusions, and concludes ‘‘ that the distinction that Keenan makes between the slow versus fast and early versus late is of no relevance’’ (Ronen, 2000, p. 99). However, Williams (2000, p. 113) allows that Manne’s conclusion is ‘‘ingeniously faulted’’ by this distinction, and Walker (2000, p. 106) observes, ’’... commentators on insider trading have tended to confuse the speed of response issue with the issue of how soon a piece of information enters the market.... Keenan is correct in pointing out that the earliness with which a piece of information enters the market is not the same thing as the speed with which market prices adjust to an item of information‘‘. The a posteriori argument for the conclusion that insider trading decreases market efficiency in Keenan (2000, paras. 1.4]1.43) is based on published results of empirical tests of market efficiency under conditions which include insider trading (strong form tests) and exclude insider trading (semi-strong form tests). The results show that markets are less efficient with insider trading than without it, because higher abnormal returns are able to be earned under strong form test conditions than under semi-strong form test conditions, and hence, that insider trading decreases market efficiency. Ronen’s rejoinder to this argument includes the by now familiar rhetorical denial of relevance: ’’This empirical evidence has no bearing on the issue‘‘ (Ronen, 2000, p. 99). Ronen’s attempt to refute the argument is singularly misdirected. ’’The fact that insider trading is (and was during the time period when these studies were conducted) constrained by a variety of insider trading rules and attendant penalties, could itself account for the empirical evidence revealing insider information to be associated with abnormal returns‘‘ (Ronen, 2000, loc. cit.). But the fact that insider trading was subject to external regulation during the test period creates a bias in the results against the association of insider trading and abnormal returns. Had insider trading not been subject to regulation during the test period, it is likely that it would have been more prevalent, and associated with higher abnormal returns, indicating a greater reduction in market efficiency. Business Ethics As already noted, Ronen (2000) shares Manne’s (1967, 1970, 1987) ethical nihilism on questions of the morality of insider trading. ’’To sum, I am neither convinced as to the necessity of morality as an absolute criterion for the desirability of insider trading, nor am I persuaded that the respect for autonomy is the proper criterion to apply to judge the morality of insider trading‘‘ (Ronen, 2000, p. 101). For Ronen, there is a trade-off between efficiency and morality which is made in the political arena. ‘‘In the absence of a well-defined social welfare function, trade-offs among different social values (such as efficiency and morality) are typically settled in democratic regimes through some voting mechanism’’ (Ronen 2000, p. 100). The most charitable interpretation that can be
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placed on these quoted remarks is that Ronen has confused issues of morality with issues of the enforcement of morality. It can be agreed that the latter involve trade-offs of costs and benefits, and are resolved in the political domain (Keenan, 2000, para. 3.13). But if it really is Ronen’s view that issues of morality involve trade-offs with different social values such as efficiency, and are typically settled in democratic regimes through voting mechanisms, then it is well to consider some of the consequences of that view. For instance, genocide sanctioned by a democratic majority is morally acceptable so long as it is efficient. A confusion of issues of morality with issues of the enforcement of morality is clearly evident in Ronen’s (2000, p. 101) defence of Manne’s (1987, p. 322) position, endorsed by Barry (1991, p. 59), that ‘‘ the moral argument‘‘ against insider trading is invalid because some (alleged) forms of the practice cannot be policed. The alleged forms of insider trading involve benefiting from private price-relevant information by refraining from trading on it until the information has been made public and prices have reacted to it, e.g. deferring a sale (purchase) on good (bad) news. Ronen (2000, p. 100) finds ’’unhelpful‘‘ the distinction between trading and refraining from trading drawn in Keenan (2000, para. 2.42) to deny that such behaviour is insider trading} refraining from trading is not trading, so it is not insider trading. Ronen (2000, loc. cit.) also suggests that Keenan (2000) overlooks investors who benefit from private price-relevant information in this way, and poses the question, which must surely be rhetorical, ’’Is this non-disclosure any less immoral than actively trading on inside information?‘‘ An argument focussing on just such behaviour, and denying that it is immoral, is set out in Keenan (2000, para. 2.43). Comments by all three commentators betray a shared misunderstanding that Keenan’s (2000) argument that insider trading is an immoral practice is an argument by analogy with rights and duties of disclosure for informed consent in the context of medical ethics. As stated in Keenan (2000, para. 2.2), the argument draws out the implications which the principle of respect for individual autonomy has for the actions of asymmetrically informed parties to an exchange of some good or service for consideration. Parallel arguments of this kind can be made in different contexts of business and professional ethics, but an argument made in one of those contexts (say, business ethics) does not depend, logically, on the argument made in the other context (medical ethics) as is the case for arguments by analogy. The purpose of including an example of the argument in the context of medical ethics in Keenan (2000, para. 2.21) was to facilitate an understanding of the logical relations between the principle of respect for individual autonomy and the rights and duties of disclosure for informed consent derived from that principle (which are crucial to the argument) by demonstrating them first in a context which was, presumably, more familiar to the reader. The argument could be restated without any reference to the context of medical ethics, and without any loss of validity. Thus, objections to the argument by Ronen (2000, p. 100) and Walker (2000, p. 108) which seek to establish counter-analogies are misdirected, and can be dismissed in
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M. G. Keenan
the ways that similar objections, now revealed to be by Williams (2000, p. 113), were dismissed in Keenan (2000, paras. 2.3]2.33). External Regulation Both Walker (2000, p. 105) and Williams (2000, p. 114) display some unease at the separation of questions of the effectiveness of regulation and questions of the (effectiveness of) enforcement of regulation in Keenan’s (2000) discussion of external regulation of insider trading. In addition to the reasons given for that separation in Keenan (2000, paras. 3.1]3.13), it can be noted here that economies may be gained in discussions of the effectiveness of the enforcement of different regulatory policies if it can be shown in advance that the effects of some policies, even with costless compliance, are counter-productive. Some policies for the external regulation of insider trading are shown to have such effects in Keenan’s (2000, paras. 3.14]3.44) analysis of three policies against three criteria for effectiveness. The policy which emerges from that analysis satisfying all three criteria is one requiring information disclosure conditional upon trading} the ’’disclose or abstain‘‘ rule. Ronen (2000, p. 102) objects that ’’...this [rule] would detract from efficiency .... [because].... if the information is neither disclosed nor traded upon, as would be consistent with the rule, the information would not be reflected in prices until becoming publicly transparent‘‘. This objection repeats Ronen’s confusion of the early/ late and quick/ slow dimensions for the timing of price adjustments to new information. Ronen (2000) also criticizes Keenan’s (2000, para. 3.43) argument that this rule does not depress incentives for a firm to generate price relevant information. Ronen’s (2000, p. 102) critical point is that ’’...all non-disclosures would be identified with the possession of negative information, and securities prices would reflect the implications of the negative information‘‘. The criticism assumes, somewhat implausibly, that market analysts, and others, are unable to differentiate non-disclosure of information when there is no relevant information to disclose from non-disclosure of relevant negative information.
References Barry, N., ’’The Ethics of Insider Trading‘‘, Policy, Spring, 1991, pp. 57]60 Keenan, M. G., ’’Insider Trading, Market Efficiency, Business Ethics and External Regulation‘‘, Critical Perspectives on Accounting, 2000, 11, 71]96. Manne, H. G., Insider Trading and the Stock Market, New York: The Free Press, 1966. Manne, H. G., ’’Insider Trading and the Law Professors‘‘, Vanderbilt Law Review, 1970, pp. 547]590. Manne, H. G., ’’Insider Trading and Property Rights in New Information‘‘ in J. Dorn, & H. G. Manne (eds) Economic Liberties and the Judiciary, Fairfax: George Mason University Press, 1987, pp. 317]329. Ronen, J., ‘‘Insider Trading Regulation in an Efficient Market: A Contradiction’’ Critical Perspectives on Accounting, 2000, 11, 97]103. Walker, M., ’’Commentary on ‘Insider Trading, Market Efficiency, Business Ethics and External Regulation’ ’’, Critical Perspectives on Accounting, 2000, 11, 105]110. Williams, P. F., ’’Loosening the Bonds: A Comment on ‘Insider Trading, Market Efficiency, Business Ethics and External Regulation’ ’’, Critical Perspectives on Accounting, 2000, 11, 111]121.