Ultimately the justification for insider trading laws is that civil remedies are totally incapable of removing the moral hazard that insider trading presents. The reason companies didn’t have their executives sign contracts barring insider trading may simply be a failure of corporate governance but even assuming the corporations were acting rationally this only demonstrates these contracts wouldn’t be effective at eliminating the moral hazard of insider trading. A simple contract wouldn’t grant the company the power to engage in intrusive investigations of a third party merely because they make sucpiscious large trades before big corporate deciscions. That party didn’t sign the contract. So any executive who wanted to make money by manipulating corporate deciscions could simply funnel the trades through a third party and run little risk of penalty.

Moreover, contract law only provides for civil penalties and these are likely to provide insufficient deterrence. An executive willing to screw over the company for private gain will realize that, given the expense and uncertainty of litigation, even if the company later sues him they will probably just settle the case for a fraction of his profit.

In short I take the argument for insider trading laws to be that the only effective way of eliminating the moral hazards is if the government has the power to investigate any suspicious trades and impose jail time.

Also the proposal to require executives to announce their trades 24 hours in advance would make things much worse. In the pure insider trading case executives can straightforwardly turn their information about corporate plans/status into private financial gain. By imposing a 24 hour public announcement requirement you eliminate the incentive to merely distribute information while leaving manipulation of corporate decisions as the only profitable strategy. As long as my planned stock purchases reliably indicate good news for my corporation I make no money so instead I might want to disguise my activity through regular camouflage purchases signaling nothing. However, I think even this does me no good if I’m only a passive informed player as the market will simply adjust the stock prices up before my purchases based on the conditional probability of good corporate news given my trade and then drop the share price again before I can sell. I can’t make particularly large purchases when I know there is really good news since the market will simply decode this signal so my gains on purchases based on inside information will be offset by my losses on the camouflage trades. However, I believe (though I haven’t worked through the complex game theory) that I can still make money by choosing if the corporation should make good or bad choices based on my overall market position.

It’ll stop one Enron but will create multitudes of other scandals.

In this case, due to the much larger potential financial rewards of insider trading, the goal of price discovery is not as important as the goal of minimizing agency problems.