Abstract

Recent stories of corporate insiders avoiding losses and, in some cases, generating enormous personal profits as their companies crumbled have led investors to question the integrity of American business and the fairness of the United States stock markets. The SEC tries to ensure the fairness of the stock markets by making and enforcing laws against unfair practices such as insider trading. In the United States, when insiders trade stock based on non-public information, they have broken the law and betrayed the trust that has been placed in them.This study used student subjects to test the relationship between the likelihood of trading based on insider information and subjective probabilities of deterrents and motivations for insider trading. Expected gain, guilt, cynicism, and fairness of laws were the determinants that had a significant relationship with the intent to trade based on insider information. This study also found support for prospect theory with regard to insider trading. The results indicate that subjects are more likely to trade based on insider information to avoid a loss than to achieve an abnormal gain. The study also finds evidence of social desirability response bias.