24 October 2009
Market Pricing vs. Research
The federal insider trading charges against Galleon hedge fund founder Raj Rajaratnam are scary for the entire investment industry because they challenge its basic business strategy—making money in capital markets through superior research. Stock prices and market indices only reflect the information that traders possess at the hands of insiders. It is their job to obtain the best information possible. If they don’t, the prices that the market produces will be unreliable, and those who must depend on the market’s uninformed judgment will suffer the consequences.
Donald J. Boudreaux makes a good case for leaving control of insider trading to corporations themselves, in his essay in the October 24-25, 2009, Wall Street Journal, “Learning to Love Insider Trading.” In his best guess as to which corporations would have stronger and broader prohibitions on insider trading, however, he forgets the point he made earlier in the essay: the most demanding and vigilant of a corporation’s clients (i.e. stakeholders) is capital. Those companies whose strategies are most dependent on pleasing institutional investors will have to be freer and more honest with critical information on their strategies and products than those who are able to finance their business plans internally.
When a good poker player is prevented from coming to the table, the only one who profits is the house. Whom is the government’s insider trading prohibition meant to protect? Mr. Boudreaux quotes Harvard economist Jeffrey Miron on that measure’s harmful consequence of encouraging small investors to trade individual stocks. Surely we would all be better off to depend on diligent and powerful investigators like Mr. Rajaratnam for investment information rather than on the imperfect capital market pricing mechanism.
The federal insider trading charges against Galleon hedge fund founder Raj Rajaratnam are scary for the entire investment industry because they challenge its basic business strategy—making money in capital markets through superior research. Stock prices and market indices only reflect the information that traders possess at the hands of insiders. It is their job to obtain the best information possible. If they don’t, the prices that the market produces will be unreliable, and those who must depend on the market’s uninformed judgment will suffer the consequences.
Donald J. Boudreaux makes a good case for leaving control of insider trading to corporations themselves, in his essay in the October 24-25, 2009, Wall Street Journal, “Learning to Love Insider Trading.” In his best guess as to which corporations would have stronger and broader prohibitions on insider trading, however, he forgets the point he made earlier in the essay: the most demanding and vigilant of a corporation’s clients (i.e. stakeholders) is capital. Those companies whose strategies are most dependent on pleasing institutional investors will have to be freer and more honest with critical information on their strategies and products than those who are able to finance their business plans internally.
When a good poker player is prevented from coming to the table, the only one who profits is the house. Whom is the government’s insider trading prohibition meant to protect? Mr. Boudreaux quotes Harvard economist Jeffrey Miron on that measure’s harmful consequence of encouraging small investors to trade individual stocks. Surely we would all be better off to depend on diligent and powerful investigators like Mr. Rajaratnam for investment information rather than on the imperfect capital market pricing mechanism.
Comments:
Post a Comment
