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The Exploitation of Inside Information at …(JFR,Nov. 98)

The Exploitation of Inside Information at …(JFR,Nov. 98). •Rules about insiders reporting of their activities. •No such rules exist for lawyers, reporters, etc. Therefore, their insider trading activities are difficult to identify.

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The Exploitation of Inside Information at …(JFR,Nov. 98)

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  1. The Exploitation of InsideInformation at …(JFR,Nov. 98) •Rules about insiders reporting of their activities. •No such rules exist for lawyers, reporters, etc. Therefore, their insider trading activities are difficult to identify. •On March 29, 1984, SEC publicly disclosed- Investigating allegation

  2. The Exploitation of Inside Information at …(JFR,Nov. 98) that R. Foster Winans, one of the authors of the Heard on the Street Column (HTS) and some stockbrokers from Kidder, Peabody are making illicit profit by using advance information on the HTS column.

  3. The Exploitation of Inside Information at …(JFR,Nov. 98) •SEC’s action based on mis-appropriation Theory: Winans had misappropriated, or stolen, confidential information entrusted to him about the content and the timing of columns that potentially could have affected securities prices.

  4. The Exploitation of Inside Information at …(JFR,Nov. 98) •Date and Methodology •21 stocks identified by SEC. 5 OTC stocks were eliminated because return data did not exist in the CRSP file. •16 cases were classified into two groups: “buy-signal” and “sell-signal”

  5. The Exploitation of Inside Information at …(JFR,Nov. 98) •The procedure resulted in 9 buy signal and 7 sell signal. •Equal number of stocks with the same buy or sell recommendation with the closest date to the HST column, constituted the control group. •Table 1- Sample of Companies

  6. The Exploitation of Inside Information at …(JFR,Nov. 98) •Event Study Methodology is utilized. •ED-270 to ED-22: Estimation Period; ED-21 to ED+20: Event Period. Explain the Methodology. •AR = (Actual Return-Expected Return) Expected Return is based on , and  estimated over the estimation period.

  7. The Exploitation of Inside Information at …(JFR,Nov. 98) •Combined ‘buy’ and ‘sell’ AR; Sell AR was multiplied by –1. •AR = AR/N; t = AR/Std. •CAAR = Cumulative AR - Explain •Table 2 – AR and CAAR of Insider Trading Group. •Table 3 – AR and CAAR of Control Group.

  8. The Exploitation of Inside Information at …(JFR,Nov. 98) •Results: Table 2, ED-1 and ED 0, positive significant AR of 3.28% and 2.96%, respectively. •For Control group, Table 3- AR for the same days were 1.15% and 0.97% and were statistically not significant. •Test of Mean: AR of ED-1 between

  9. The Exploitation of Inside Information at …(JFR,Nov. 98) Insider Trading group vs. Control group- 3.28% is significantly higher than 1.15%. •CAAR- Sharp run up of CAAR preceding the publication and the trend begins to reverse immediately after the publication. Table 2.

  10. The Exploitation of Inside Information at …(JFR,Nov. 98) •Reversal of CAAR may suggest that the insider group may have a second opportunity to make abnormal profit by reversing their position, i.e. buying unfavorably featured stock and short-selling the favorably featured stock.

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