That's the standard story yes, but it's like playing one game and calling it quits. Those who game the system would be found out (perhaps through insider info) and their finance costs would increase.
Other firms would take to releasing info themselves in order to set expectations and reduce risk - which already happens, but there'd be a huge driver for more so - lest others trade early on the info.
The effect on startups, even in your scenario, would be nil / positive. We already have a ton of risk priced in, and we're not required to file 10K's, etc. Also, most startup boards include the lead investor who has access to all "insider" info already - you don't think they share that with that in future follow on rounds?
Is it your take that this is an iterated Prisoner's Dilemma, so no one will cheat, and everyone will use an honest tit for tat strategy? Except that the payoff for cheating is high enough that you can probably earn enough to stop playing. Additionally, these tricks are difficult to prove--it took years for Enron to unravel.
Also, because cheaters can't be predicted in advance and your "cure" is only retroactive, the capital costs are born by everyone.
Startups get capital because the business they create will eventually be worth a multiple of their earnings. If that multiple is reduced because of an "insider cheating" penalty, the attractiveness of the investment is reduced, and therefore the amount of investment that will chase it. There is no floor on the risk discount that can be assigned to the price of an investment, except perhaps $0.00.
seems like you're conflating insider trading with all forms of manipulation & "real" cheating. Enron wasn't mainly insider trading - it was fraud by fudging their numbers. My argument is to use greed to incentivize more market information that wouldn't have been public - so Enron's are found sooner. This will lead to a smoother market because of:
- more accurate and timely information (stock pricing)
- firms increasing transparency (info) to remove financing volatility
- Current SEC 10k's, etc. are of little value as we've seen. It must be forced to prevent loopholes - insider trading does this from the inside.
What I'm not saying: That market manipulation (ex. Pump and Dump) should be legal - thats another issue, and provides no value (information or otherwise). That's anti-competitive behavior with no societal benefit I can see - and hence should be regulated and leaked using insider trading ;-)
Other concerns:
- Fraud in insider trading: Perhaps it should still be illegal to lie about your inside knowledge, and further firms that trade would have every incentive to confirm the data with other sources.
- Risk pricing would be far better than luck if there were a lot of data points for each company due to multiple leaks over time and other business intel. The Street already know these CEOs, etc. - they don't exist in vacuums.
- Your startup risk pricing ideas don't address the differences I cited - who is insider trading startups? That'd mean investing based on the inside numbers the company has - which is already normal for investors to have access to, and if a founder fudges those - it's fraud.
Your concerns about risk pricing are due to this "real" cheating, which insider trading helps discover, and hence eliminates risk.
I wouldn't say off-base. I think we just differ on a few key assumptions, like how effective efficient markets are, how dishonest some people are, how easy it is to prove accounting manipulation and real cheating even with open books, and the subtle manipulations people could rationalize, etc.
But you have interesting ideas and presented them diplomatically, and I like heretical thinking, so have some upvotes.
Other firms would take to releasing info themselves in order to set expectations and reduce risk - which already happens, but there'd be a huge driver for more so - lest others trade early on the info.
The effect on startups, even in your scenario, would be nil / positive. We already have a ton of risk priced in, and we're not required to file 10K's, etc. Also, most startup boards include the lead investor who has access to all "insider" info already - you don't think they share that with that in future follow on rounds?