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

  • Juan Jose Cruces

    (Department of Economics, Universidad de San Andres)

  • Enrique L. Kawamura

    ()

    (Department of Economics, Universidad de San Andres)

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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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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