Insider Trading Essay -- Business, Investment, Trading

It can fairly be said that an Investor considering an investment decision (whether to purchase, sell or hold stock-taking) in publicly traded come with acts on the dry land 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 go away 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 restricting 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 art to all investor, the law of insider trading is one of the vehicles which is used by society to allocate the property right to informati on generated by firm and it can be ensured that by virtue of being insider, director or companys officer cannot explore private information in trading of his or her companys stock hardly 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 prevail 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... ...ces in compensation package to their executives among two groups. Graver and Graver (1995) find that intangible assets of a firm are important factor to determine the executives compensation and a large fa ctor of their compensation derives from long term incentive compensation like stock option grants. When executive receivers a large portion of compensation in stocks, and 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.