Securities regulations identify the “Officers” of a firm. These persons include the Chairman, the board of directors, the treasurer, and other key executives. These officers are also termed “insiders.” When they trade in the shares of their own firm, these insiders have to disclose the trades to the Securities and Exchange Commission.

Market participants keenly watch reports of insider trading. The strategy for some mutual funds is actually predicated on the belief that insider trading is a leading indicator of the stock’s future performance.

Required:

a. Why might market participants reasonably believe that insider trade is a leading indicator of a firm’s future performance?

b. Why do many governments issue detailed regulations concerning insider trading?

c. Insider trading is legal and unregulated in many countries. Given this fact, argue whether regulations increase or decrease the value of inside trades as a leading indicator of firm performance. More generally, what are the costs and benefits of lifting all restrictions on insider trading?