Insider trading may convey information to the market and promote accurate pricing of stocks. In this dissertation, I investigate insider trading at the turn of the century. In the first essay, I investigate insider trading activity in technology stocks during the high price - high volatility period of the late 1990s. I document that insiders of technology firms were heavy sellers during the ten month pre-peak period in which stock prices more than doubled. The technology stocks that were sold by insiders more extensively in the pre-peak period had lower returns in the post-peak period. I furthermore investigate the relation between the net order flows (buyer initiated minus seller initiated trades) and abnormal insider trading activity. I document that the net order flow is positively related to abnormal insider trading activity. However, this positive relation becomes weaker in the peak period; which implies less price discovery through insider trading during the rise of technology stock prices. In the second essay, I document that disclosure requirements significantly affect insider trading behavior. The Sarbanes-Oxley Act of 2002 requires expedited and on-line disclosure of insider transactions. This increase in the visibility of insider trading reduces informational advantage of insiders and increases the likelihood of facing legal sanctions for insiders. I document that insider purchases significantly declined after the Sarbanes- Oxley Act. In addition, the incidences of insider purchases (sales) prior to positive (negative) earnings surprises declined after the Act. Finally, I document that the earnings announcements become more informative after the Act, which is consistent with less price discovery through insider trading prior to earnings announcements. However, the evidence that the decline in insider trading contributes to more informative earnings announcements is pronounced for insider purchases but not for insider sales.

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Thesis (Ph. D.)--University of Missouri-Columbia, 2001. / Typescript. Vita. Includes bibliographical references (leaves 120-125). Also available on the Internet.

Thesis (Ph. D.)--University of Missouri-Columbia, 2001. / Typescript. Vita. Includes bibliographical references (leaves 120-125). Also available on the Internet.

Insider threats--trusted members of an organization who compromise security--are considered the greatest security threat to organizations. Because of ignorance, negligence, or malicious intent, insider threats may cause security breaches resulting in substantial damages to organizations and even society. This research helps alleviate the insider threat through developing mitigation strategies and detection techniques in three studies. Study 1 examines how security controls--specifically depth-of-authentication and training recency--alleviate non-malicious insider threats through encouraging secure behavior (i.e., compliance with an organization's security policy). I found that `simpler is better' when implementing security controls, the effects of training diminish rapidly, and intentions are poor predictors of actual secure behavior. Extending Study 1's finding on training recency, Study 2 explains how different types of training alleviate non-malicious insider threat activities. I found that just-in-time reminders are more effective than traditional training programs in improving secure behavior, and again that intentions are not an adequate predictor of actual secure behavior. Both Study 1 and Study 2 introduce effective mitigation strategies for alleviating the non-malicious insider threat; however, they have limited utility when an insider threat has malicious intention, or deliberate intentions to damage the organization. To address this limitation, Study 3 conducts research to develop a tool for detecting malicious insider threats. The tool monitors mouse movements during an insider threat screening survey to detect when respondents are being deceptive. I found that mouse movements are diagnostic of deception. Future research directions are discussed to integrate and extend the findings presented in this dissertation to develop a behavioral information security framework for alleviating both the non-malicious and malicious insider threats in organizations.

The objective of my two essays together is to examine whether the trades made by the insiders prior to open market repurchase (OMR) announcements contain information that can be used to identify the repurchases that are motivated by undervaluation. The existing literature on shares repurchases suggests that while undervaluation has been a dominant motive behind repurchases for past few decades, identifying these undervalued firms still remains a challenge. The book-to-market ratio is commonly used as a proxy for mispricing; however, its ability to identify undervalued repurchasing firms has recently come into doubt (Chan et al., 2004). Instead, I propose using proxies based on insider trading to identify the undervalued repurchasing firms.In the first essay, I document a relation between insider trading and both the short- and long-run stock returns of open market repurchasing firms. My findings suggest that the personal trades made by insiders prior to the OMR announcements contain information that can be used to identify undervalued repurchasing firms. I use various measures of insider trading and show that firms with high (low) insider buying (selling) prior to repurchase announcements earn abnormal stock returns in both the short- and long-run. I also find a positive (negative) relation between insider buying (selling) and the actual repurchasing activity of the firms.In my second essay, I further test whether the trades made by insiders prior to OMR announcements contain information that can be used to identify the repurchases that are motivated by undervaluation by examining the post-announcement operating performance. I find a relation between insider trading and the post-announcement operating performance for the OMR firms that is consistent with the hypothesis that insiders' trades prior to OMR announcements are informative. Specifically, I find that firms with high insider buying prior to the OMR announcements outperform their corresponding control firms, whereas, firms with low insider buying do not. In addition, I test for a relation between insider trading and (a) the accruals management around OMR announcements, and (b) the market reaction to the earnings announcements made by the OMR firms. I find a weak evidence of insiders timing their trades along with accruals management. However, the market reaction to earnings announcements made by the OMR firms does not seem to vary with level of insider trading. Overall, the evidence is consistent with insiders of repurchasing firms knowing when their stocks are undervalued and they timing both their personal and firm level trades accordingly.

This thesis presents three models of asset pricing involving non-competitive behavior and asymmetric information. In the first model, a risk averse investor with private information about dividends trades shares over an infinite time horizon with risk neutral uninformed agents. The informed investor trades strategically in equilibrium. The second model also involves an infinite time horizon, but all agents are risk averse and equally informed about dividends. Non-competitive behavior is exogenously specified; price takers trade shares with a strategic investor who accounts for the effects of her trades on the stock price. In this case, an endogenous information asymmetry arises in equilibrium. Closed form equilibria are derived for both models and implications for price dynamics are explored. While the first model constitutes a new extension of the multiperiod Kyle model of insider trading, the second model generates more interesting price dynamics. If the strategic investor manages a large mutual fund, significant risk premia and price volatility may arise in equilibrium. In fact, if mutual fund participation is sufficiently widespread, multiple equilibria may exist. The third model extends the multiperiod Kyle model to a case where the insider observes a noisy signal of the stock's terminal liquidation value. An equilibrium much like Kyle's is derived. Price tends toward value over time, and stock price volatility depends on both the drift and volatility of the insider's private signal. Like the Kyle model, the insider's trading activity leaves no detectable trace in trading volume, expected returns, or price volatility.

This paper will examine the effects of inside information on bid-ask spreads when the probability of insider trading and the likelihood of an informational event occurring varies using a theoretical, simulation-based approach. The results show that bid-ask spreads narrow as the number of time periods increase, regardless of probability of insider trading or the likelihood of an informational event occurring. For a high, given likelihood of an informational event occurring, the highest average spreads were found for lower probabilities of insider trading as time increased. For a high, given probability of insider trading, the highest average spreads were found for lower likelihoods of an informational event occurring as time increased. The variances increased along with the probability of insider trading as well as with the likelihood of an informational event occurring. The maximum average spread settled near 0.25, typically found for a probability of insider trading of 1 and a likelihood of an information event occurring of 0.5. The results verify previous research done by Glosten and Milgrom (1985), Easley, Hvidkjaer and O’Hara (2002) and Potterton (2011). The results also may reconcile the differences between the findings of Easley, Hvidkjaer and O’Hara (2002) and Potterton (2011).

This paper will discuss arguments for and against the regulation of insider trading, examining economic discussions of efficiency and philosophical outlines of justice based arguments. I will also outline the development of legislation in the United States over the last century, and examine recent events in order to identify the current sentiments regarding government prosecution. The most efficient outcome for the market is found through actions guided by justice. By using regulation as a restraint to unbounded self-interest, investor confidence in the fairness of the market remains high and individuals are protected from abuses to their property and rights.

The competition for external capital amongst small and developing financial markets has resulted in a growing awareness of the importance of investor protection laws if markets are to be competitive. One particularly important aspect of such laws is the need to control the behaviour of insiders. Insider trading, widely perceived as trading by investors who have an unfair advantage by virtue of access to confidential information, represents a significant threat to market confidence and investors' willingness to invest in the market. For small markets therefore, not controlling such behaviour represents a significant cost in terms of the development of the market and the economy as a whole. However, while insider trading can do significant harm to the market, it also has the potential to be beneficial to the market as a signal of incorrectly priced information. The question becomes therefore how best to balance the advantages and disadvantages of insider trading. Most markets have relied on regulations to control insiders, however, little research has been done to establish if this is effective.This thesis seeks to provide additional evidence with respect to the role of regulation in controlling insider trading. The issue is explored within the context of the New Zealand market where recent legislation, the Securities Market Amendment Act 2002, offers a prime opportunity to seek further understanding on the issue. In particular, four studies focussed on the role of regulation with respect to insider trading are undertaken within this thesis. In the first the impact of the law change on the profitability and informational base of insiders is examined. A significant decline in profitability is observed in addition to evidence of a change in the informational basis of insiders' trades from knowledge of upcoming announcements to short-term market mispricing. The impact of the new law on four aspects of the market is then examined. A significant increase in liquidity is found following the introduction of the new law, as well as significant reductions in the cost of equity, bid-ask spread and return volatility. The law therefore appears to have improved these aspects of the market. The bid-ask spreads were then examined in more depth by observing the impact of the laws on the cost of informed trading. Strong evidence of a decline in the cost of informed trading was observed, along with significant decreases in the proportion of the spread composed of information asymmetry costs. The declines were largest for those firms most prone to insider trading.Lastly, the elements of an effective insider trading regime were investigated by examining the impact of various legal variables on the cost of informed trading and the total spread. The results indicated that stronger laws have resulted in lower spreads and less informed trading costs, and that effective regimes should prevent insiders passing on their information, should rely on financial penalties over criminal sanctions, and should be both enforceable and policed by a strong public regulator. Overall this thesis finds strong evidence that insider trading laws can be effective in controlling the behaviour of insiders, and that well drafted statutory regulations can be of significant benefit to the market.