29 August 2006
What Harm in Insider Trading?
Do small shareholders deserve what they get when management and private equity funds alternate between MBOs and IPOs? Small shareholders could exert their voting power over corporate boards of directors to demand top performance and transparent accounting in their companies. In that case management couldn’t so easily manipulate the P&L and Balance Sheets for their own benefit, at the expense of small shareholders outside the buyout loop.
Instead, the growth of stock ownership, through 401Ks and mutual funds, has led small shareholders lazily to believe they can trust the market to maximize returns on their investments. In fact, investing is hard work: maybe the current best bet is to find private equity funds that welcome small investors.
Changes in a company’s market valuation mean short-term volatility. That has long been the source of rewards to smart traders in commodity as well as stock markets. Small shareholders who are patient and invest for the long term ride out these perturbations, missing the short-term possibilities for outsized windfalls, but capturing the payback on ultimate company success from the skills of their richly rewarded managers. In this view, the primary result of combating insider trading would be to smooth out the curve on the trend lines. Without their ups and downs, the smartest managers may go elsewhere.
Do small shareholders deserve what they get when management and private equity funds alternate between MBOs and IPOs? Small shareholders could exert their voting power over corporate boards of directors to demand top performance and transparent accounting in their companies. In that case management couldn’t so easily manipulate the P&L and Balance Sheets for their own benefit, at the expense of small shareholders outside the buyout loop.
Instead, the growth of stock ownership, through 401Ks and mutual funds, has led small shareholders lazily to believe they can trust the market to maximize returns on their investments. In fact, investing is hard work: maybe the current best bet is to find private equity funds that welcome small investors.
Changes in a company’s market valuation mean short-term volatility. That has long been the source of rewards to smart traders in commodity as well as stock markets. Small shareholders who are patient and invest for the long term ride out these perturbations, missing the short-term possibilities for outsized windfalls, but capturing the payback on ultimate company success from the skills of their richly rewarded managers. In this view, the primary result of combating insider trading would be to smooth out the curve on the trend lines. Without their ups and downs, the smartest managers may go elsewhere.
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