Insider Trading

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It can fairly be said that an Investor considering an investment decision (whether to purchase, sell or hold stock) in publicly traded company acts on the basis of extensive information which is available by corporation to him until the last moment of his investing decision and try to determine the fair price of corporate stock. In the light of continuous creation of a particular impression of corporate affairs by the corporation, new information by corporate can vanish the importance of previous available information to investor. In the scenario only one kind of investors can get advantage over others, who is either very close to corporate operation (corporate officers) or can access nonpublic price-sensitive information to corporation (large shareholder). These investors are known as insider.

To ensure fair platform of trading to all investor, the law of insider trading is one of the vehicles which is used by society to allocate the property right to information generated by firm and it can be ensured that by virtue of being insider, director or company’s officer cannot explore private information in trading of his or her company’s stock but many studies (e.g., Jaffe, 1974; Finnerty, 1976a,b; Seyhun, 1986, 1988a,b; Rozeff and Zaman, 1988; Lin and Howe, 1990) conclude that Insiders like to buy (sell) their own company stock before price-favorable (unfavorable) information disseminates in public and take the advantage of nonpublic information. For example, Jaffe (1974a) find the insiders are able to make abnormal return by taking position in their own stock but insiders’ short-term prediction power is greater than long-term predication.

Several aspects of insider trading activity are debatable. Like is insider trading is...

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...ces in compensation package to their executives between two groups. Graver and Graver (1995) find that intangible assets of a firm are important factor to determine the executives’ compensation and a large portion of their compensation derives from long term incentive compensation like stock option grants. When executive receivers a large portion of compensation in stocks, then his investment portfolio is subject to more idiosyncratic risk than any diversity investment portfolio or to survive, for example to pay home rent, he needs liquidity, which in turn, either to achieve diversify investment portfolio or to achieve liquidity, he sells his a part of his stake in open market even his stock in undervalued (Meulbroek, 2000). We assume that insiders selling of intangible assets’ firms are less likely to convey information to public than tangible assists’ firms.
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