Legalizing insider trading may have some advantages if managers of a company could freely trade its stock. For instance, corporate accounting scandals would be detected sooner if:
A) people from outside the firm had information about the accounting fraud before the managers would.
B) managers had a strong incentive to report the fraud to the government rather than to trade the stock.
C) speculation allowed the accounting fraud to continue for a longer period before being discovered.
D) managers who knew the true performance of the company had an incentive to trade the stock, tipping the world off that something was afoot.

Question

Quizplus · Accepted Answer

Legalizing insider trading would give managers who have inside knowledge about the true performance of the company an incentive to trade the stock. This could tip off investors and regulators that something is amiss, leading to earlier detection of accounting fraud and other corporate scandals. Option A is incorrect as people from outside the firm may not have access to the insider information needed to detect fraud. Option B is incorrect because managers may prioritize maximizing their own gains over reporting fraud to the government. Option C is incorrect as allowing speculation may actually make it harder to detect fraud by distorting stock prices.

Legalizing Insider Trading May Have Some Advantages If Managers of a Company