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Insider Trading. Insider information is information (about company strategy and plans) that someone within a company has but that is not available to those outside the company.

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insider trading

Insider Trading

Insider information is information (about company strategy and plans) that someone within a company has but that is not available to those outside the company.

The moral problems connected with insider information concern the use that individuals may make of such information while they are still members of the firm.

Two aspect of the problem:

1. One is that of some one within the firm using information for his or her private gain, at the expense of the firm.

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This is called conflict of interest
  • 2. The other is the use of insider information by someone within a firm advantage over those not in the firm.
  • Those who attempt to justify insider trading in terms of market efficiency are mistaken. They believe in the market as an impersonal mechanism which does not care who gains or looses in its transaction. Winner and losers are beside the point, because the market is simply an efficient means of matching buyers and sellers.
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Yet even though the stock market acts impersonally, it mediates transactions between people, and transactions between people are properly subject to moral rules.
  • Thus, those buy and sell do care who gains and loses. Both parties desire and deserve a fair market.
  • The second case of illegitimate use of insider information also concerns personal gain, not at the company’s expense but at the expense of those not connected with the company. This typically occurs in trading the stock of the company for which one works.
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SEBI considers an “insider” any one who has pertinent information that is not publicly available, and that gives the trader an advantage over public. Thus the secretaries, lawyers, consultants, financial printers, and others who have access to inside information become insider because of their knowledge.
  • Many companies go to extreme lengths to keep takeovers and similar plans secret. They use code words for the companies involved. They guard against tapped phones and electronic surveillance.
  • Efficiency and Fairness
  • Efficiency is not the only important factor in market or in ethical thinking.
  • Fairness is central to both.
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Corporate takeovers
  • Efficiency and diversification are the two common rationales for mergers and acquisition.
  • Takeovers
  • Hostile Friendly
  • A hostile take over A friendly takeover
  • is one that takes is one where one
  • place against the company buys
  • wishes of the another with acquired
  • acquired company’s company’s consent
  • managers.
  • The corporate restructuring that we are observing these days posing many ethical questions.
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Greenmail: Situation in which a large block of stock is held by an unfriendly company. This forces the target company to repurchase the stock at a substantial premium to prevent a takeover. It is also known as a "Bon Voyage Bonus" or a "Goodbye Kiss". Not unlike blackmail, this is a dirty tactic, but it's very effective. golden parachute
  • A clause in an executive's employment contract specifying that he/she will receive large benefits in the event that the company is acquired and the executive's employment is terminated. These benefits can take the form of severance pay, a bonus, stock options, or a combination thereof.