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Insider Trading and Corporate Governance in Latin America

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Author Info
Juan Cruces
Enrique Kawamura

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Abstract

Unlike outside investors, controlling groups have the option to trade on inside information and can exercise it at the expense of outside investors. This paper computes informed trading probabilities (ITPs) for the universe of liquid stocks from seven Latin American countries, trading both at home and as ADRs, and applies ITPs in order to address corporate governance questions. Substantial heterogeneity of ITP is found within a given institutional environment. Nonetheless, significant differences in mean ITP are identified across volume ranges, countries, and security types. ITP has an intuitively appealing correlation with some (but not all) of the country-wide investor protection variables used in the literature. Substantial increases in ITP are found just before public corporate announcements, suggesting that privately-informed agents are exploiting their privilege when it is most valuable. ITP is priced in the market: companies with higher ITPs fetch lower Tobin’s qs. It is concluded that Informed Trading Probability proxies for unobservable corporate governance quality as the heterogeneity of firm behavior seems to be recognized by the market and priced accordingly.

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Paper provided by Inter-American Development Bank, Research Department in its series RES Working Papers with number 3206.

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Date of creation: Sep 2005
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Handle: RePEc:idb:wpaper:3206

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Hasbrouck, Joel, 1991. " Measuring the Information Content of Stock Trades," Journal of Finance, American Finance Association, vol. 46(1), pages 179-207, March. [Downloadable!] (restricted)
  2. Utpal Bhattacharya & Hazem Daouk, 2002. "The World Price of Insider Trading," Journal of Finance, American Finance Association, vol. 57(1), pages 75-108, 02. [Downloadable!] (restricted)
  3. Elizabeth R. Odders-White & Mark J. Ready, 2006. "Credit Ratings and Stock Liquidity," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 19(1), pages 119-157. [Downloadable!] (restricted)
  4. Berkowitz, Daniel & Pistor, Katharina & Richard, Jean-Francois, 2003. "Economic development, legality, and the transplant effect," European Economic Review, Elsevier, vol. 47(1), pages 165-195, February. [Downloadable!] (restricted)
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  5. von Furstenberg, George M. & Tabora, Carlos B., 2004. "Bolsa or NYSE: price discovery for Mexican shares," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 14(4), pages 295-311, October. [Downloadable!] (restricted)
  6. Wang, Jiang, 1994. "A Model of Competitive Stock Trading Volume," Journal of Political Economy, University of Chicago Press, vol. 102(1), pages 127-68, February. [Downloadable!] (restricted)
  7. Maug, Ernst, 2002. "Insider trading legislation and corporate governance," European Economic Review, Elsevier, vol. 46(9), pages 1569-1597, October. [Downloadable!] (restricted)
  8. Keown, Arthur J & Pinkerton, John M, 1981. "Merger Announcements and Insider Trading Activity: An Empirical Investigation," Journal of Finance, American Finance Association, vol. 36(4), pages 855-69, September. [Downloadable!] (restricted)
  9. Glosten, Lawrence R. & Milgrom, Paul R., 1985. "Bid, ask and transaction prices in a specialist market with heterogeneously informed traders," Journal of Financial Economics, Elsevier, vol. 14(1), pages 71-100, March. [Downloadable!] (restricted)
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  10. Vega, Clara, 2006. "Stock price reaction to public and private information," Journal of Financial Economics, Elsevier, vol. 82(1), pages 103-133, October. [Downloadable!] (restricted)
  11. Fernando Lefort & Eduardo Walker, 2005. "The Effect of Corporate Governance Practices on Company Market Valuation and Payout Policy in Chile," RES Working Papers 3210, Inter-American Development Bank, Research Department. [Downloadable!]
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  13. Ricardo Leal & André Carvalhal-da-Silva, 2005. "Corporate Governance and Value in Brazil (and in Chile)," RES Working Papers 3208, Inter-American Development Bank, Research Department. [Downloadable!]
  14. Leland, Hayne E & Pyle, David H, 1977. "Informational Asymmetries, Financial Structure, and Financial Intermediation," Journal of Finance, American Finance Association, vol. 32(2), pages 371-87, May. [Downloadable!] (restricted)
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  15. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November. [Downloadable!] (restricted)
  16. Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1998. "Law and Finance," Journal of Political Economy, University of Chicago Press, vol. 106(6), pages 1113-1155, December. [Downloadable!] (restricted)
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  17. Lee, Charles M C & Ready, Mark J, 1991. " Inferring Trade Direction from Intraday Data," Journal of Finance, American Finance Association, vol. 46(2), pages 733-46, June. [Downloadable!] (restricted)
  18. Meulbroek, Lisa K, 1992. " An Empirical Analysis of Illegal Insider Trading," Journal of Finance, American Finance Association, vol. 47(5), pages 1661-99, December. [Downloadable!] (restricted)
  19. Heidle, Hans G. & Huang, Roger D., 2002. "Information-Based Trading in Dealer and Auction Markets: An Analysis of Exchange Listings," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 37(03), pages 391-424, September. [Downloadable!]
  20. Albert Wang, F., 1998. "Strategic trading, asymmetric information and heterogeneous prior beliefs," Journal of Financial Markets, Elsevier, vol. 1(3-4), pages 321-352, September. [Downloadable!] (restricted)
  21. Bhattacharya, Utpal & Daouk, Hazem & Jorgenson, Brian & Kehr, Carl-Heinrich, 2000. "When an event is not an event: the curious case of an emerging market," Journal of Financial Economics, Elsevier, vol. 55(1), pages 69-101, January. [Downloadable!] (restricted)
  22. Cornell, Bradford & Sirri, Erik R, 1992. " The Reaction of Investors and Stock Prices to Insider Trading," Journal of Finance, American Finance Association, vol. 47(3), pages 1031-59, July. [Downloadable!] (restricted)
  23. John, Kose & Lang, Larry H P, 1991. " Insider Trading around Dividend Announcements: Theory and Evidence," Journal of Finance, American Finance Association, vol. 46(4), pages 1361-89, September. [Downloadable!] (restricted)
  24. Klapper, Leora F. & Love, Inessa, 2002. "Corporate governance, investor protection, and performance in emerging markets," Policy Research Working Paper Series 2818, The World Bank. [Downloadable!]
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  25. Easley, David & O'Hara, Maureen, 1987. "Price, trade size, and information in securities markets," Journal of Financial Economics, Elsevier, vol. 19(1), pages 69-90, September. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Alberto Chong & Florencio Lopez-de-Silanes, 2007. "Corporate Governance in Latin America," RES Working Papers 4494, Inter-American Development Bank, Research Department. [Downloadable!]
  2. Alberto Chong & Florencio Lopez-de-Silanes, 2007. "Gobierno Corporativo en América Latina," RES Working Papers 4495, Inter-American Development Bank, Research Department. [Downloadable!]
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