Law and economic literature on insider trading can be categorized into two categories- agency theories and market theories of insider trading. Agency theories of insider trading deal with the impact of insider trading on firm-level efficiency and corporate value (Jensen and Meckling, 1976). On other hand, Market theories of insider trading analyze the implication of insider trading on market performance (Bhattacharya and Daouk, 2000) e.g. the cost of capital, liquidity and market efficacy etc., for example, Manna (1966) suggests that the insider trading allows stock markets to be more efficiency. Surprisingly, most of the debates on insider trading are concentrated on U.S markets (Beny, 2005).La Porta et al (1998) claim that law and its level of enforcement vary according to countries’ infrastructures, and differences in law and its enforcement may explain variations in market structures and stock market practices among different countries. Moreover, Maug (2002) presents a mathematical model in which a dominate owner has information advantage over small shareholders where insider trading regulations are not properly enforced. Besides, Leland (1992) argues that if the insider trading is allowed, stock prices reflect better information at the cost of less liquidity that magnitude depends on economic environment.
Baiman and Verrecchia (1996) argue that the level of insider trading varies with level of financial disclosure, the culture, and the economics of different countries. Therefore, it can be expected that the impact of insider trading activities on the stock market varies country to country. Bhattacharya and Daouk (2002) address the effect of insider trading regulation and its enforcement on the cost of capital by taking 51 countries over more than 20 years, and they summaries that insider trading regulation and its enforcement of different countries help in reducing the cost of capital of firms. Even though, the magnitude of effect varies with the level of enforcement of a country. Moreover, Beny (2005) does an attempt to find whether insider trading law matter on Ownership dispersion, stock price informativeness and stock liquidity. In empirical results, he finds that Ownership dispersion, stock price informativeness and stock liquidity are greater where insider trading law and its enforcement are more restricted. Moreover, the most important aspect of the formal law is penalties or criminal sanctions that are imposed on who violates insider trading law.
Fernandes and Ferreira (2009) argue that insider trading regulation and its enforcement improve the informativeness of stock prices, but this improvement is concentrated in developed markets.
The seriousness of insider trading was not brought to light until some time after the stock market crash of 1929. This specific event can be summed up as a day where many investors traded around 16 million shares
Insider trading is the act of purchasing or selling securities based on material, nonpublic information. Information is consider to be material if a reasonable person would use it in such a way that would persuade them to partake in an exchange of securities, or if it was reasonable to believe that it would affect the market price of a security once the information has become public (Carlin 2003). Information can only be acted upon once it has been made public, otherwise, unfair trades would take place that could negatively affect the general public and shareholders of the company. Those who are employees of the company upon employment have a signed agreement to put the interests of the shareholders first. Acting on tips from within the company or other sources could negatively affect the corporation’s success, resulting in a shareholders loss.
The Efficient Market Hypothesis suggests that market prices fully reflect all information available to the public. However, practitioners and regulator are uncertain as to the validity of this hypothesis. The questions that Bloomfield raises are: If market prices truly reflect information, why do investors waste efforts by trying to identify mispriced stock prices? Why do managers try to hide bad news in footnotes? And why do regulators try to prevent them from doing this? Robert J. Bloomfield presents an alternative to EMH called the Incomplete Revelation Hypotheses. IRH suggests that statistical data which is more costly drives fewer trading interest. Therefore information that is more costly to extract from publicly available information is not fully reflected in the market prices.
Insider trading, just like with any other company, is a big rule in the stock market business. This means that if someone has information that is not public, they should not use that to their advantage in the market. Even a transaction that seems improper must be avoided. Trades are monitored very closely and Cisco cooperates with government agencies for investigations. Cisco employees are also not allowed to pass on information they know to their family or friends to avoid a loss or make a profit. This would be a breach of corporate confidentiality. Employee should avoid talking about work in public places so information isn’t slipped
Also in an event study the authors show that firms announcing the appointment of multiple directors for the first time experience higher abnormal returns. Beasley (1996) finds that firms whose outside directors hold more board seats are less likely to commit fraud because inclusion of outside members on the board of director increases the board 's effectiveness at monitoring management for the prevention of financial statement fraud. Cotter, Shivdasani, and Zenner (1997) examine the role played by independent outside director during tender offers and they report that target firm with independent boards commands higher merger premium, because the authors find that target shareholder gains are higher in resisted offers also having majority outside directors. Similarly, Brown and Maloney (1999) find higher acquirer returns when directors with multiple board seats serve on the acquirer’s board. These studies all provide ample evidence that outside director has avital role not only in the corporate governance of the firm but also are beneficial for firm
Business owners and managers familiar with the court litigation system understand that high litigation costs and long delays make it difficult and expensive to resolve business disputes in court. They also understand that most civil cases that go to court are settled before trial. They are solved after spending considerable amount of time and money in the complex pre-trial phase, but just in time to avoid the risk of trial. Mediation and commercial arbitration provide superior solutions that help in resolving business disputes. Mediation puts the parties immediately in control of the situation and helps them get desirable outcomes without expending vast resources on litigation procedures (Berg, Permanent Court of Arbitration. International Bureau, International Council for Commercial Arbitration, 2005).
There is a long-lasting debate on whether emph{insider trading (IT)}, defined as trading in possession of material private information, should be allowed or forbidden and, even now, it is not clear what the optimal IT regime might be. IT regulation, and whether this regulation is enforced, differs across countries. For instance, IT laws are lax in Norway, and Mexico and strict in the US and Ireland; however, there have been enforcement cases in Norway and the US, but never neither in Mexico nor in Irelandfootnote{See cite{Beny:2005} and cite{FerreiraFernandes:2009}.}. There are differences in what is considered illegal IT between American and European regulations: in the US, under Rule 10b-5, anyone in possession of material inside information shall disclose his private information or abstain from tradingfootnote{The origin of this interpretation can be traced to emph{SEC v. Texas Gulf Sulphur Co}, although latter the Supreme Court limited the liability to the cases in which there is a fiduciary duty of the insider to the persons with whom he trades (emph{Chiarella v. US}), to tippees (emph{Dirks v. SEC}), and to the cases in which there is a fiduciary duty of the insider to the source of the information (the so-called misappropriation theory, endorsed by the Supreme Court in emph{US v. O'Hagan}).}; in Europe, directive 2003/6/EC on insider dealing and market manipulation requires ``inside information'' to be of a ``precise nature", and forbids both, trading in possession of inside information and the disclosure of this information, ``unless such disclosure is made in the normal course of the exercise of his employment, profession or duties".
... what the stock market would be like if everyone were to trade on material nonpublic information. If this were to be true then some would have advantages while others would not and the public perceived fairness of trading in the market would decline. This is not to say that there would be no positive outcomes, however, it is logical to assume that not everyone would wish this to be a universal action therefore under the universal maxim insider trading is unethical. Under the second formulation of the categorical imperative people are not to be used as a means to an end. A person who trades on material nonpublic information can be seen as using the person who provided the information as a means or other investors who are not privy to the same information as a means to an end. Therefore under this maxim it is logical to assume that insider trading is unethical.
If the president tells his barber, who tells his baby sitter, who tells her doctor, who tells you, the barber, baby sitter, doctor and you are all "temporary insiders". Anyone who has material information is prohibited from trading, based on that knowledge, until the information is available to the general public. In addition to the financial penalties, there are criminal penalties. Many now feel those penalties are not strong enough and are working to increase them
First to be discussed is a concrete definition of “insider trading” as it is discussed in this essay. According to the “European Communities 1989 Insider Dealing Directive: insider trading is the dealing on the basis of materials unpublished, price-sensitive information possessed as a result of one’s employment.(Insider Trading)”
Author provides some numbers, for the reader to find out about the situation in other companies. This article is totally related to the business, because it deals with the information, useful for the businessmen for decision making. The overview of the economical situation in the stock market is very useful for those people, whose businesses are closely connected to investments and gambling. Business can be strongly affected by the article, because the fed company can lose its potential investors and the gamblers can have a chance to avoid unnecessary loss. As a result the other companies can get more investors, and the investors more profit, but only in case, the author’s predictions are true. So, the article can generally decrease the number of gamblers involved into stock market in the nearest future.
According to the United States Securities Exchange Commission (SEC), “Illegal insider trading refers to the buying or selling of security, in breach of a fiduciary duty or other relationships of trust and confidence, while in possession of material, nonpublic information about the security.” (2) There are various examples of illegal insider trading cases. When corporate officers, directors, and employees of law, banking, and printing find confidential information about the development of the business and trade its corporation’s securities, it is consider a crime. When people take advantage of the information given to them, they take advantage of their employees, which can possibly lead to termination.
One of the best examples to understand the strong form market efficiency is to look at insider trading. Insiders in a company have access to private information and the ability to trade on this information but if strong form efficiency holds true then these insiders should not be able to profit off this knowledge. The Securities and Exchange Commission, along with vario...
There has been a drive towards corporate governance which has been driven by a greater need for shareholder protection. If investors feel well cushioned then there is a higher chance that t...
This case study is not about Ms. Stewart direct participation with illegal insider trading as the media had steered the public to believe. To begin, Ms. Stewart received a phone call from Ann Armstrong, her assistant, stating that Peter Bacanovic, her stockbroker, “thinks ImClone is going to start trading down.” (Arnold, Beauchamp, Bowie, 2013, p. 390) Although Ms. Stewart was not able to get a hold of Peter, she talked to his assistance, Douglas Faneuil,