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Business and Society 9th Edition by Archie Carroll,Ann Buchholtz
Edition 9ISBN: 978-1285734293Business and Society 9th Edition by Archie Carroll,Ann Buchholtz
Edition 9ISBN: 978-1285734293 Exercise 3
Playing with Presets
According to Rule 10b5-1, inside trading can be legal if the trade simply carries out a plan that was set in place before the information arrived, i.e., a preset plan. This is helpful to executives who want to trade in their own company's stock because it enables them to trade even when they possess inside knowledge, as they almost always do. The existence of the plan can be used as evidence that the inside information was not a factor in the decision to trade. Executives are not required to file these plans with a federal agency or to disclose when they open or close one. Various studies have found that insiders do better in the stock market than one would normally expect. Some observers point to these higher returns and argue that executives are benefitting from insider trading. However, it is virtually impossible for an outside observer to determine if inside information played a factor in executive trades because the preset plans allow for intermittent buying and selling of shares, and they are not filed with a federal agency. Some observers argue that not letting executives trade when they have inside information is absurd because executives always have nonpublic material information about their firms and they should be able to trade in their firm's stock. They suggest that the problem is relatively small and need not form the basis of new regulation. Others argue that executive insider trading gives the executives an unfair advantage over the average investor.
1. With whom do you agree? Do you believe that executives have a right to trade in their own firm's shares? Please justify your answer and explain what restrictions you would place on their trades.
2. If you do not believe that executives should be able to trade in their own shares, please explain your rationale for limiting their behavior. Do you consider other aspects of being an executive (e.g., salary, bonuses, options) to compensate for not being permitted to trade?
3. Given the current situation, what policy recommendation would you give to the SEC? Could transparency play a part in resolving this issue? If so, how?
According to Rule 10b5-1, inside trading can be legal if the trade simply carries out a plan that was set in place before the information arrived, i.e., a preset plan. This is helpful to executives who want to trade in their own company's stock because it enables them to trade even when they possess inside knowledge, as they almost always do. The existence of the plan can be used as evidence that the inside information was not a factor in the decision to trade. Executives are not required to file these plans with a federal agency or to disclose when they open or close one. Various studies have found that insiders do better in the stock market than one would normally expect. Some observers point to these higher returns and argue that executives are benefitting from insider trading. However, it is virtually impossible for an outside observer to determine if inside information played a factor in executive trades because the preset plans allow for intermittent buying and selling of shares, and they are not filed with a federal agency. Some observers argue that not letting executives trade when they have inside information is absurd because executives always have nonpublic material information about their firms and they should be able to trade in their firm's stock. They suggest that the problem is relatively small and need not form the basis of new regulation. Others argue that executive insider trading gives the executives an unfair advantage over the average investor.
1. With whom do you agree? Do you believe that executives have a right to trade in their own firm's shares? Please justify your answer and explain what restrictions you would place on their trades.
2. If you do not believe that executives should be able to trade in their own shares, please explain your rationale for limiting their behavior. Do you consider other aspects of being an executive (e.g., salary, bonuses, options) to compensate for not being permitted to trade?
3. Given the current situation, what policy recommendation would you give to the SEC? Could transparency play a part in resolving this issue? If so, how?
Explanation
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1.
Executives have a legal right to trad...
Business and Society 9th Edition by Archie Carroll,Ann Buchholtz
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