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Insider Trading and Corporate Governance in Latin America: A Sequential Trade Model Approach

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Author Info

  • Juan Jose Cruces

    (Department of Economics, Universidad de San Andres)

  • Enrique L. Kawamura

    ()
    (Department of Economics, Universidad de San Andres)

Abstract

Unlike outside investors, controlling groups have the option to trade on inside information, and can exercise it at the expense of the former. A simple theoretical model rationalizes the relationship between corporate governance and insider trading decisions through reputational arguments. We compute probabilities of private information-based trading (PIN) for the universe of liquid stocks from seven Latin American countries, trading both at home and as ADRs, and apply them to address corporate governance questions. We find substantial heterogeneity of PIN within a given institutional environment. Nevertheless, we can identify significant differences in mean PIN across volume ranges, countries, and security types. PIN has an intuitively appealing correlation with some (but not all) of the country-wide investor protection variables used in the literature. PIN is priced in the market: companies with higher PINs fetch lower Tobin?s qs. We conclude that the private information-based 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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File URL: ftp://webacademicos.udesa.edu.ar/pub/econ/doc86.pdf
File Function: First version, 2005
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Bibliographic Info

Paper provided by Universidad de San Andres, Departamento de Economia in its series Working Papers with number 86.

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Length: 60 pages
Date of creation: Dec 2005
Date of revision: Dec 2005
Handle: RePEc:sad:wpaper:86

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Related research

Keywords: insider trading; corporate governance; Latin America; sequential trade model;

References

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  1. Vega, Clara, 2006. "Stock price reaction to public and private information," Journal of Financial Economics, Elsevier, Elsevier, vol. 82(1), pages 103-133, October.
  2. David Easley & Robert F. Engle & Maureen O'Hara & Liuren Wu, 2008. "Time-Varying Arrival Rates of Informed and Uninformed Trades," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 6(2), pages 171-207, Spring.
  3. Utpal Bhattacharya & Hazem Daouk, 2002. "The World Price of Insider Trading," Journal of Finance, American Finance Association, American Finance Association, vol. 57(1), pages 75-108, 02.
  4. Guillermo Llorente & Roni Michaely & Gideon Saar & Jiang Wang, 2001. "Dynamic Volume-Return Relation of Individual Stocks," NBER Working Papers 8312, National Bureau of Economic Research, Inc.
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  16. Cornell, Bradford & Sirri, Erik R, 1992. " The Reaction of Investors and Stock Prices to Insider Trading," Journal of Finance, American Finance Association, American Finance Association, vol. 47(3), pages 1031-59, July.
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  19. V.V. Chari & Patrick J. Kehoe, 1989. "Sustainable plans," Staff Report, Federal Reserve Bank of Minneapolis 122, Federal Reserve Bank of Minneapolis.
  20. Maug, Ernst, 2002. "Insider trading legislation and corporate governance," European Economic Review, Elsevier, Elsevier, vol. 46(9), pages 1569-1597, October.
  21. Hayne E. Leland and David H. Pyle., 1976. "Informational Asymmetries, Financial Structure, and Financial Intermediation," Research Program in Finance Working Papers, University of California at Berkeley 41, University of California at Berkeley.
  22. Meulbroek, Lisa K, 1992. " An Empirical Analysis of Illegal Insider Trading," Journal of Finance, American Finance Association, American Finance Association, vol. 47(5), pages 1661-99, December.
  23. Lee, Charles M C & Ready, Mark J, 1991. " Inferring Trade Direction from Intraday Data," Journal of Finance, American Finance Association, American Finance Association, vol. 46(2), pages 733-46, June.
  24. Hasbrouck, Joel, 1991. " Measuring the Information Content of Stock Trades," Journal of Finance, American Finance Association, American Finance Association, vol. 46(1), pages 179-207, March.
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Cited by:
  1. Diego A. Agudelo, 2007. "Do Local or Foreign traders know more in an emerging market? A possible solution of the puzzle," DOCUMENTOS DE TRABAJO CIEF, UNIVERSIDAD EAFIT 011117, UNIVERSIDAD EAFIT.

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