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It is important to note that insider trading is currently outlawed under the Securities Act 17 of 2004 (Chapter 24: 25) as amended (Securities Act) in Zimbabwe. This Act enumerates some practices that may give rise to insider trading liability in the Zimbabwean financial markets. Nonetheless, numerous challenges, such as the lack of adequate financial resources, the lack of sufficient persons with the relevant skills and expertise on the part of the enforcement authorities, lack of political will, inadequacy of insider trading provisions, poor cooperation and collaboration between the relevant authorities and the ongoing coronavirus (Covid-19) pandemic have negatively impeded the effective regulation and combating of insider trading in Zimbabwe. To this end, the author explores the stated challenges and recommend measures that could be used by regulatory bodies and other relevant enforcement authorities to enhance the regulation and combating of insider trading in the Zimbabwean financial markets. This study aims to enhance the detection and combating of insider trading in Zimbabwe.

A qualitative research methodology is used through the analysis of relevant legislation and case law.

It is hoped that the findings and recommendations made in this study will be considered by the Zimbabwean policymakers.

The study does not use empirical research methodology.

The findings and recommendations made in this study could enhance the combating of insider trading activities in Zimbabwe.

The study seeks to curb insider trading in the Zimbabwean financial markets and financial institutions in the wake of the covid-19 pandemic-related regulatory and enforcement challenges.

The study provides original research on the regulation and combating of insider trading activities in Zimbabwe.

This study aims to examine the deterrent effect of the Market Abuse Directive (MAD) introduced in the European Union in 2003. The purpose is to evaluate whether the Directive has resulted in significant changes in pre-bid stock price run-ups observed in mergers and acquisitions within the Portuguese, Spanish and Greek stock markets.

The study analyzes a sample of 199 mergers and acquisitions in the aforementioned stock markets. The magnitude of pre-bid stock price run-ups is investigated as an indicator of illegal insider trading. The effects of the MAD, toehold positions of bidders and industry similarity between firms involved in the deals are assessed using statistical analysis.

The study’s findings indicate that the MAD has been ineffective in deterring investors from trading on non-public information. Pre-announcement price run-ups remain significant, suggesting ongoing illegal insider trading practices. Additionally, the research reveals that pre-bid stock price run-ups tend to be lower when bidders have established a larger toehold position in the target and when the firms involved in the deal belong to the same industry.

This study contributes to the existing literature by providing empirical evidence on the ineffectiveness of the MAD in deterring illegal insider trading. The findings highlight the limitations of increasing penalties without an effective monitoring system in place. Furthermore, the study identifies additional factors, such as toehold positions and industry similarity, that influence the magnitude of pre-announcement price run-ups in mergers and acquisitions.

This study aims to investigate the impact of mandatory audit partner rotation (MAPR) on Chinese listed firms’ insider trading, as well as the moderating effects of firm characteristics on this impact. The economic mechanism behind this impact is also explored.

This study conducts a regression analysis on firms associated with mandatory and voluntary audit partner rotation based on 2009–2019 firm data and examines whether corporate insiders of these two types of firms increase their share sales within 12 months before their financial statements are submitted to a new rotated auditor.

Client firms’ corporate insiders increase their share sales within 12 months before their financial statements are submitted to a new mandatory rotated auditor. In addition, such an association is less pronounced for client firms that changed from Big 4 auditors to those with higher financial constraints. This is more pronounced for client firms with higher information asymmetry. The economic mechanism of the finding is that is the MAPR implementation reduces earnings management activities from client firms. Moreover, client firms’ buy-and-hold stock returns decline in the first year after MAPR.

This study should assist investors, corporate shareholders and Chinese policymakers. Investors can be well protected through the adoption of MAPR because upcoming auditors enhance the audit quality of clients by restraining managers’ manipulation of reported earnings and declining firms’ insider trading afterwards. Investors, Chinese policymakers and corporate shareholders should pay more attention to firms’ financial report quality, auditor selection, financial situation, corporate governance and the information environment. Explicitly, firms with less transparent financial report quality, non-big 4 auditors and fewer financial constraints are more likely to be involved in insider trading.

To the best of the authors’ knowledge, none of the extant studies have examined the impact of MAPR on insider sales. This study extends the research on the effect of the audit process on firm market performance by investigating the impact of audit partner rotation policy on insider trading behaviors.

After reading the case, the students shall be able to explain the concept of insider trading and differentiate between illegal insider trading and legal insider trading, business ethics, financial institutions, financial markets and accounting; to interpret the legal framework for prevention of insider trading; to identify the role and significance of the market regulator, Securities and Exchange Board of India (SEBI), in detecting financial crimes such as insider trading; to demonstrate the association between information, stock trading and stock prices within the framework of efficient markets; and to appraise the ethical dilemma in a family-owned firm, where the family members of the promoter group are alleged to have indulged in a financial crime.

The case revolves around allegations of insider trading against the promoter and the promoter group of the family owned and controlled firm, Lux Industries Limited. On January 24, 2022, the SEBI, the regulator of securities markets in India, accused Udit Todi, the Executive Director of Lux Industries Limited, of engaging in insider trading through a chain of 14 connected parties. Udit Todi was also the son of the Managing Director, Pradip Kumar Todi, and the nephew of the Executive Chairman, Ashok Kumar Todi. In its interim order, SEBI alleged a breach of insider trading regulations by a group of 14 connected entities that had built up long positions starting from May 21, 2021, before the quarterly financial results (Q4) and the annual results of the financial year (FY) 2021 in the equity shares of Lux Industries Limited, with its registered office in Kolkata, India, were announced. Subsequently, they squared off the long positions to make a profit of ₹29.43m. To restore the confidence of the investors, the Executive Chairman, Ashok Kumar Todi, needed to review the matter expeditiously and impartially. Taking into consideration the family ties of the accused, it was not going to be an easy task, yet, it had to be done. The case highlights the role of the regulator, SEBI, in unearthing financial frauds such as insider trading in an emerging market such as India.

Postgraduate programs in management, Executive education programs.

Teaching notes are available for educators only.

CSS 1: Accounting and Finance

This study aims to explore the relationship between chief executive officer (CEO) power and stock price crash risk in India. Furthermore, it seeks to analyse how insider trades may moderate the impact of CEO power on stock price crash risk.

A study of 236 companies from the S&P BSE 500 Index (2014–2023) have been analysed through pooled ordinary least square (OLS) regression in the baseline analysis. To enhance the results' reliability, robustness checks include alternative methodologies, such as panel data regression with fixed-effects, binary logistic regression and Bayesian regression. Additional control variables and alternative crash risk measure have also been utilised. To address potential endogeneity, instrumental variable techniques such as two-stage least squares (IV-2SLS) and difference-in-difference (DiD) methodologies are utilised.

Stakeholder theory is supported by results revealing that CEO power proxies like CEO duality, status and directorship reduce one-year ahead stock price crash risk and vice versa. Insider trades are found to moderate the link between select dimensions of CEO power and stock price crash risk. These findings persist after addressing potential endogeneity concerns, and the results remain consistent across alternative methodologies and variable inclusions.

This study significantly advances research on stock price crash risk, especially in emerging economies like India. The implications of these findings are crucial for investors aiming to mitigate crash risk, for corporations seeking enhanced governance measures and for policymakers considering the economic and welfare consequences associated with this phenomenon.

This study updates the literature review of Jones (1987) published in this journal. The study pays particular attention to two important themes that have shaped the field over the past 35 years: (1) the development of a range of innovative new statistical learning methods, particularly advanced machine learning methods such as stochastic gradient boosting, adaptive boosting, random forests and deep learning, and (2) the emergence of a wide variety of bankruptcy predictor variables extending beyond traditional financial ratios, including market-based variables, earnings management proxies, auditor going concern opinions (GCOs) and corporate governance attributes. Several directions for future research are discussed.

This study provides a systematic review of the corporate failure literature over the past 35 years with a particular focus on the emergence of new statistical learning methodologies and predictor variables. This synthesis of the literature evaluates the strength and limitations of different modelling approaches under different circumstances and provides an overall evaluation the relative contribution of alternative predictor variables. The study aims to provide a transparent, reproducible and interpretable review of the literature. The literature review also takes a theme-centric rather than author-centric approach and focuses on structured themes that have dominated the literature since 1987.

There are several major findings of this study. First, advanced machine learning methods appear to have the most promise for future firm failure research. Not only do these methods predict significantly better than conventional models, but they also possess many appealing statistical properties. Second, there are now a much wider range of variables being used to model and predict firm failure. However, the literature needs to be interpreted with some caution given the many mixed findings. Finally, there are still a number of unresolved methodological issues arising from the Jones (1987) study that still requiring research attention.

The study explains the connections and derivations between a wide range of firm failure models, from simpler linear models to advanced machine learning methods such as gradient boosting, random forests, adaptive boosting and deep learning. The paper highlights the most promising models for future research, particularly in terms of their predictive power, underlying statistical properties and issues of practical implementation. The study also draws together an extensive literature on alternative predictor variables and provides insights into the role and behaviour of alternative predictor variables in firm failure research.

This paper aims to examine the relationship between earnings quality and corporate cash holdings in an emerging economy. Existing literature posits that earnings quality is a result of information asymmetry and firms with lower earnings quality increases cash holdings, to shield the firm from future uncertainties. In this paper, the authors propose a ‘private benefits hypothesis’, which suggests that lower earnings quality is an indicator of opportunism and expropriation of resources in the firm, through tunneling or excessive executive compensations. As a result, firms with lower earnings quality increase cash holdings in their control, to increase their private benefits and to avoid the scrutiny of the external stakeholders. The authors further examine the monitoring role played by institutional investors on cash holdings, with varying degrees of earnings quality.

This study uses an unbalanced panel data sourced from Prowessdx, from 2000 to 2019. The analysis employs 20,231 firm-year observations from 2,421 firms. Earnings quality is calculated following Dechow and Dichev (2002).

Empirical analysis confirms that the firms with higher earnings quality reduce cash. Further, institutional investors reduce the cash holdings in firms with higher earnings quality. Institutional investors effectively reduce the cash only in firms with at least 10% of equity shareholding. The results are robust to alternative measures of earnings quality and endogeneity concerns.

This study diverges from the information asymmetry hypothesis in the existing literature on earnings quality and cash holdings and highlights the underlying private benefits hypothesis, that will impact cash holdings. Next, the 10% institutional shareholding is important in the Indian context as it represents the minimum threshold at which block holders can request extraordinary general meetings (Section 100 of the Companies Act 2013) or the involvement of the National Company Law Tribunal (NCLT) (Section 213 of the Companies Act 2013). This study highlights that unlike in Anglo-Saxon economies, institutional investors or other minority shareholders are empowered by the Companies Act 2013 to play a vital role in corporate governance with a mere 10% equity.

This study delves into the nuanced implications of short-sale constraints on stock prices within the context of stock market efficiency. While existing research has explored this relationship, inconsistencies persist in their findings. The purpose of this study is to conduct a comprehensive review of literature to elucidate the reasons behind these disparities.

A systematic review of existing theoretical and empirical studies was conducted following the PRISMA method. The analysis centered on discerning the factors contributing to the divergence in projected stock prices due to these constraints. Key areas explored included assumptions related to expectations homogeneity, revisions, information uncertainty, trading motivations and fluctuations in supply and demand of risky assets.

The review uncovered multifaceted reasons for the disparities in findings regarding the influence of short-sale constraints on stock prices. Variations in assumptions related to market expectations, coupled with fluctuations in perceived information uncertainty and trading motivations, were identified as pivotal factors contributing to differing projections. Empirical evidence disparities stemmed from the use of proxies for short-sale constraints, varied sample periods, market structure nuances, regulatory changes and the presence of option trading.

This study emphasizes the significance of not oversimplifying the impact of short-sale constraints on stock prices. It highlights the need to understand these effects within the broader context of market structure and methodological considerations. By delineating the intricate interplay of factors affecting stock prices under short-sale constraints, this review provides a nuanced perspective, contributing to a more comprehensive understanding in the field.

Motivated by the findings of Bhabra and Hossain (2017) that highlight an improvement in US market performance in the post-Sarbanes–Oxley (SOX) period, this paper aims to investigate how this change varies with the methods of payment used for the deals.

Deductive in nature and using an event study approach, this paper uses a sample of 675 deals between 1999 and 2006 to test three research hypotheses in a pre-post setting.

Results show that at the aggregate level, there is a significant improvement in the market performance of US acquirers around the announcement day in the aftermath of the passage of SOX 2002. Considered separately, both US stock acquirers and cash acquirers did not experience any significant improvement in market performance in the post-Sarbanes–Oxley period. These results are robust to controlling for governance, firm and deal variables, as well as industry and year fixed effects.

Exploratory in nature, the results are to be interpreted in light of the sample size and the period under investigation.

The results provide evidence for regulators and legislators on the contribution of SOX 2002 to curbing managerial misconduct. Significant improvement in the market performance also signals more confidence in managerial decisions and a reduction in agency problems. The insignificant change in stock acquirers’ market performance can be an indication that policymakers should exert more efforts to improve shareholders' confidence in the quality of disclosure.

This investigation provides unique insights on whether SOX has been effective in mitigating mispricing concerns associated with stock-financed acquisitions and whether it was effective in moderating the governance mechanism associated with cash-financed acquisitions.

This paper aims to examine the impact of announcements related to 77 interventions by 46 listed Indian pharmaceutical firms during COVID-19 on the abnormal returns of the firms. The study also finds the variables which explain cumulative abnormal returns (CARs).

This study uses standard event methodology to compute the abnormal returns of firms announcing pharmaceutical interventions in 2020 and 2021. Besides this, the multilayer perceptron technique is applied to identify the variables that influence the CARs of the sample firms.

The results show the presence of abnormal returns of 0.64% one day before the announcement, indicating information leakage. The multilayer perceptron approach identifies five variables that explain the CARs of the sample companies, which are licensing_age, licensing_size, size, commercialization_age and approval_age.

The study contributes to the efficient market literature by revealing how firm-specific nonfinancial disclosures affect stock prices, especially in times of crisis like pandemics. Prior research focused on determining the effect of COVID-19 variables on abnormal returns. This is the first research to use artificial neural networks to determine which firm-specific variables and pharmaceutical interventions can influence CARs.