IDEAS home Printed from https://ideas.repec.org/p/sad/wpaper/86.html
   My bibliography  Save this paper

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

Author

Listed:
  • 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.

Suggested Citation

  • Juan Jose Cruces & Enrique L. Kawamura, 2005. "Insider Trading and Corporate Governance in Latin America: A Sequential Trade Model Approach," Working Papers 86, Universidad de San Andres, Departamento de Economia, revised Dec 2005.
  • Handle: RePEc:sad:wpaper:86
    as

    Download full text from publisher

    File URL: ftp://webacademicos.udesa.edu.ar/pub/econ/doc86.pdf
    File Function: First version, 2005
    Download Restriction: no

    References listed on IDEAS

    as
    1. Hasbrouck, Joel, 1991. " Measuring the Information Content of Stock Trades," Journal of Finance, American Finance Association, vol. 46(1), pages 179-207, March.
    2. Utpal Bhattacharya & Hazem Daouk, 2002. "The World Price of Insider Trading," Journal of Finance, American Finance Association, vol. 57(1), pages 75-108, February.
    3. Giovanna Nicodano & Sudipto Bhattacharya, 1999. "Insider Trading, Investment and Liquidity: A Welfare Analysis," FMG Discussion Papers dp334, Financial Markets Group.
    4. 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 855-869, September.
    5. Chari, V V & Kehoe, Patrick J, 1990. "Sustainable Plans," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 783-802, August.
    6. Luis Angel Medran & Xavier Vives, 2004. "Regulating Insider Trading When Investment Matters," Review of Finance, European Finance Association, vol. 8(2), pages 199-277.
    7. Easley, David & Kiefer, Nicholas M & O'Hara, Maureen, 1996. " Cream-Skimming or Profit-Sharing? The Curious Role of Purchased Order Flow," Journal of Finance, American Finance Association, vol. 51(3), pages 811-833, July.
    8. Leland, Hayne E & Pyle, David H, 1977. "Informational Asymmetries, Financial Structure, and Financial Intermediation," Journal of Finance, American Finance Association, vol. 32(2), pages 371-387, May.
    9. repec:hrv:faseco:30747191 is not listed on IDEAS
    10. 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 1031-1059, July.
    11. Pablo T. Spiller, 2003. "The Institutional Foundations of Public Policy: A Transactions Approach with Application to Argentina," Journal of Law, Economics, and Organization, Oxford University Press, vol. 19(2), pages 281-306, October.
    12. Guillermo Llorente & Roni Michaely & Gideon Saar & Jiang Wang, 2002. "Dynamic Volume-Return Relation of Individual Stocks," Review of Financial Studies, Society for Financial Studies, vol. 15(4), pages 1005-1047.
    13. 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.
    14. 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.
    15. Meulbroek, Lisa K, 1992. " An Empirical Analysis of Illegal Insider Trading," Journal of Finance, American Finance Association, vol. 47(5), pages 1661-1699, December.
    16. Elizabeth R. Odders-White & Mark J. Ready, 2006. "Credit Ratings and Stock Liquidity," Review of Financial Studies, Society for Financial Studies, vol. 19(1), pages 119-157.
    17. 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.
    18. Wang, Jiang, 1994. "A Model of Competitive Stock Trading Volume," Journal of Political Economy, University of Chicago Press, vol. 102(1), pages 127-168, February.
    19. Maug, Ernst, 2002. "Insider trading legislation and corporate governance," European Economic Review, Elsevier, vol. 46(9), pages 1569-1597, October.
    20. Vega, Clara, 2006. "Stock price reaction to public and private information," Journal of Financial Economics, Elsevier, vol. 82(1), pages 103-133, October.
    21. Fernando Lefort & Eduardo Walker, 2005. "The Effect of Corporate Governance Practices on Company Market Valuation and Payout Policy in Chile," Research Department Publications 3210, Inter-American Development Bank, Research Department.
    22. Easley, David, et al, 1996. " Liquidity, Information, and Infrequently Traded Stocks," Journal of Finance, American Finance Association, vol. 51(4), pages 1405-1436, September.
    23. 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.
    24. 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 1361-1389, September.
    25. Rafael La porta & Florencio Lopez-De-Silanes & Andrei Shleifer & Robert Vishny, 2002. "Investor Protection and Corporate Valuation," Journal of Finance, American Finance Association, vol. 57(3), pages 1147-1170, June.
    26. Easley, David & O'Hara, Maureen, 1992. " Time and the Process of Security Price Adjustment," Journal of Finance, American Finance Association, vol. 47(2), pages 576-605, June.
    27. Easley, David & Kiefer, Nicholas M & O'Hara, Maureen, 1997. "One Day in the Life of a Very Common Stock," Review of Financial Studies, Society for Financial Studies, vol. 10(3), pages 805-835.
    28. Antweiler, Werner, 2001. "Nested random effects estimation in unbalanced panel data," Journal of Econometrics, Elsevier, vol. 101(2), pages 295-313, April.
    29. Lee, Charles M C & Ready, Mark J, 1991. " Inferring Trade Direction from Intraday Data," Journal of Finance, American Finance Association, vol. 46(2), pages 733-746, June.
    30. 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(3), pages 391-424, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    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 011117, Universidad EAFIT.
    2. Agudelo, Diego A. & Giraldo, Santiago & Villarraga, Edwin, 2015. "Does PIN measure information? Informed trading effects on returns and liquidity in six emerging markets," International Review of Economics & Finance, Elsevier, vol. 39(C), pages 149-161.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sad:wpaper:86. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Tamara Sulaque) The email address of this maintainer does not seem to be valid anymore. Please ask Tamara Sulaque to update the entry or send us the correct email address. General contact details of provider: http://edirc.repec.org/data/desanar.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.