BPUB621.2003.Lecture.Slides.5.Insider.Trading

BPUB621.2003.Lecture.Slides.5.Insider.Trading - [5](1):...

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Wharton School: [5](1): Inside Information in Markets Seller offers to sell his shares of a corporation, but for what reason? Cash for consumption, paying off debts, or reinvesting in other assets Or knows that the corporation’s earnings will decline Buyer should adjust his offer to buy downward to take account of the latter Buyer offers to purchase shares of a corporation, but for what reason? Investing excess cash Or knows that the corporation earnings will increase Seller should adjust his offer to sell upward to take account of the latter Inefficient Market - mutually beneficial transactions will not occur Some buyers would be willing to buy at a higher price Some sellers would be willing to sell at a lower price Thus, some transactions will not occur
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Wharton School: [5](2): Lessons for Securities Markets Markets are less efficient at determining prices Wider bid-ask spreads Investors without confidential information will exit the markets Fewer small investors will participate directly in the markets Savings of small investors will be channeled to professional investors Market price will be determined the bids and asks of professional investors with non-public information Only investors who believe they have better non-public information will trade Participating investors will focus on obtaining better non-public information Investors will focus less effort on generating new information or assessing public information
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Wharton School: [5](3): Laws Governing Insider Trading Insider Trading means trading on “material non-public information” Three main securities laws govern insider trading Section 16(b) of SEC Act (1934) Regulates short-swing purchases and sales by corporate insiders SEC Rule 14e-3(a): Civil liability for trading on non-public information about tender offers SEC Rule 10b-5, Sections (1) or (3): Civil liability for fraudulent practices, which includes insider trading Applies to corporate insiders, quasi insiders, and their tippees Applies to outsiders with a duty of confidentiality and their tippees
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Wharton School: [5](4): Section 16(b) of SEC Act (1934) Obligations of directors, officers, and owners of more that 10% of shares in any corporation: Must report all trades in the stock of their corporation Must refund any profits on “short-swing” trades to the corporation A short-swing trade is a purchase and subsequent sale within 6 months Section 16(b) allows corporate insiders to trade in their stocks, but prevents them from profiting on non-public information
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This note was uploaded on 07/27/2009 for the course ECON BPU taught by Professor Perry during the Spring '09 term at Rutgers.

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BPUB621.2003.Lecture.Slides.5.Insider.Trading - [5](1):...

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