Insider Trading: Business and Market Impacts Analysis

The essay delves into the detrimental impact of insider trading on both companies and financial markets by examining confidentiality breaches and their consequences. It highlights how such activities undermine business ethics and investor confidence, leading to potential job losses and damaged reputations. Legal repercussions for individuals involved in insider trading are discussed, along with strategies businesses can employ to safeguard against these risks. The discussion incorporates insights from various studies, including those of Rajaratnam's case, underscoring the financial and reputational costs associated with insider trading.

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THE COSTS OF INSIDER TRADING
Name
University

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THE COSTS OF INSIDER TRADING
When company employee shares confidential information about the company with
unauthorized personnel, he/she puts the company at risk. Companies participating in the stock
markets are the most likely to be affected because some investors will have an unfair advantage
(Doffou, 2010). The companies whose shares are sold in the stock exchanges have an obligation
to openly disclose their financial statements at specified dates to the stock markets. The open
declaration of the information provides a level playground for the investors.
Confidentiality is a practice that helps embrace business related secrets which help create a
common understanding and fostering self-belief among business partners (Perote & Brio, 2011,
p. 5). Violation of the privacy policy of any company means that possibly one is following the
company’s proceedings possibly to bring it down. When an employee discloses either the
institution’s client information or any confidential information to a third party, this is bound to
affect the company negatively. The third party, perhaps a competitor seeks any relevant
information to overtake the target company. Employees are also fond of trending their
employer's information to third parties for personal gains especially monetary favors. For
instance, in the case study, Raj Rajaratnam emerged a popular and successful financial guru
simply from insider trading. Rajaratnam succeeded in creating a well-anchored firm owing to his
analytical skills and involvement in a series of illegal acts.
At the first stages, insider trading does not seem risky especially for the individuals who
think that they are intelligent enough to escape. Breaching confidential information whether one
has signed a written confidentiality agreement or not can pose the employee, the employer and

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the clients to irreversible consequences (Thompson, 2013, p. 19). The most immediate course
taken when an employee is found to have publicized information is termination. Some
companies may decide to take legal measures against the individuals who violate their privacy.
The company is likely to waste its resources, specifically money and time when a decision to
undergo lawsuit damages is made. In the case study about the Galleon group, they are bound to
have incurred some costs in the court processes. Although refunds are effective to any costs and
losses, possibly the employer would have made more profits if this had not happened.
Clients, especially the frequent customers, keep track of the companies in the stock
exchange markets. Continued instances of insider trading will definitely keep them off.
Ineffective employers expose their company to the risk of losing its reputation at the markets
(Nejat, 2010, p. 11). Ideally, if the company is unable to keep its secrets, no client will be ready
to trust it. Soaring back to the initial position after a fall could take centuries or a lifetime.
If by any chance, an employer doubts or has facts that any client has access to the
company’s secrets, the best appropriate measure is to terminate all the ongoing transactions. The
employer found guilty of breaching the information should then be made to undergo dire legal
measures. In my opinion, the knowledge of any controversy affecting the firm’s confidentiality
would definitely affect the decisions of trading the stocks. Perhaps, I would reconsider the
markets before trading the stocks. Taking thorough investigations may help the company identify
some facts not captured in the earlier reports.

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References
Doffou, A., 2010. Insider Trading: A Review of Theory and Empirical Work. [Online]
Available at:
https://www.researchgate.net/publication/228321500_Insider_Trading_A_Review_of_Theory_a
nd_Empirical_Work
[Accessed 26 September 2017].
Nejat, 2010. Insiders' profits, costs of trading, and market efficiency. Journal of Financial
Economics, 16(2), pp. 8-13.
Perote, J. & Brio, E. D., 2011. What Enhances Insider Trading Profitability?, Salamanca:
International Atlantic Economic Society.
Thompson, J. H., 2013. A Global Comparison of Insider Trading Regulations. International
Journal of Accounting and Financial Reporting, 3(1), pp. 1-23.