Essay on Insider Information On The Price Of The Stock

985 Words Dec 1st, 2016 4 Pages
For example, if through inside information, a stock is known to be undervalued then the holders of this information will exploit this by buying shares, which will increase demand thus the price of the shares. The price will rise up to the level supported by the private information, with no incentive to keep buying more, the price will stabilise at this equilibrium. Therefore in a market that is strong form efficient it is deemed impossible for investors to make abnormal gains using any type of information whether it is publicly available or not (Carter, no date). Insider information is hard to measure, therefore indirect studies are used to evaluate strong form EMH, such as Keown and Pinkerton (1981) investigation of inside knowledge on mergers between companies, concluding that the share price quickly incorporated this and which didn 't allowed investors to make abnormal profits. Certain insiders can however have access to information before other investors, and exploit this, seen through prosecutions against investors for the offence of insider dealing, which suggests that the market can be exploited with such information (Carter, no date). However, the number of court cases are said to be relatively few in contrast to the total transactions that take place in a capital market as a whole
Managers within a firm usually hold private information about the form 's future prospects and performance that may not initially be available to outsiders. This issue arises from…

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