Executive Social Networks,Insider Trading,and Tunneling in Israel
Most insider trading discussion focuses on U.S. firms, where managers are “strong” and owners are “weak.” Israel, by contrast, has many publicly traded firms where a single or small, tightly knit group of shareholders holds a controlling interest in the company through a business group. In these “group firms,” the primary corporate governance problem is the risk of minority shareholder expropriation through tunneling, or transferring assets out of the firm and to the controller. The risk of tunneling essentially implies a large information asymmetry problem between the controller and the world of outside investors, who can no longer reliably assess the value of the firm.
This research hypothesizes that in these cases, the presence of insider trading serves to add information into the market, thereby reducing information asymmetry, while in other cases, the behavior should more closely mirror that of “dispersed-shareholder” regimes like the U.S.