This Article explores the efficient design of civil liability for mandatory securities disclosure violations by established issuers. An issuer not publicly offering securities at the time of a violation should have no liability. Its annual filings should be signed by an external certifier—an investment bank or other well-capitalized entity with financial expertise. If the filing contains a material misstatement and the certifier fails to do due diligence, the certifier should face measured liability. Officers and directors should face similar liability, capped relative to their compensation but with no indemnification or insurance allowed. Damages should be payable to the issuer, not traders in its shares, because the true social harm from issuer misstatements is poor corporate governance and reduced liquidity. A trader is as likely to be a gainer by selling, as a loser by buying, at the misstatement-inflated price. An issuer publicly offering securities at the time of a violation should be liable to purchasers for the resulting inflation in price. Such liability is an antidote to what otherwise would be an extra incentive not to comply. This design would increase incentives for U.S. issuers to comply with periodic disclosure rules. At the same time, litigation-expensive fraud-on-themarket class actions would be eliminated. So would underwriter liability for lack of due diligence, a sharply diminishing spur for disclosure given the speed of modern offerings. For countries considering implementation of securities disclosure civil liability systems for the first time, this design helps them get it right from the start.
The most recent models learn over time, making the necessary adjustments to a new level of peaks or troughs, which enables the more accurate prediction of turning points. The Smooth Regression Model may be regarded as having a linear and a nonlinear component and may over time determine whether there is only a linear or nonlinear component or, in some cases, both. The present study focuses on the impact effect analysis of the European markets contamination by sovereign debt (particularly in Portugal, Spain, France and Ireland). The smooth transition regression approach applied in this study has proved to be a viable alternative for the analysis of the historical behavioural adjustment between interest rates and stock market indices. We found evidence in the crisis regime, i.e., large negative returns, especially in the case of Portugal, where we obtained the greatest nonlinear threshold adjustment between interest rates and stock market returns. ; peer-reviewed
This article demonstrates that required disclosure can play an important role in corporate governance. It assists shareholders in effectively exercising their voting franchise and enforcing management's fiduciary duties. It also affects positively four of the economy's key mechanisms for controlling corporate management: the market for corporate control, share price-based managerial compensation, the cost of capital, and monitoring by external sources of finance. In so doing, it improves the selection of proposed new investment projects in the economy and the operation of existing facilities. Finally, it may improve managerial performance simply by forcing managers to become more aware of reality.
Purpose– This paper aims to investigate the relationship between internal governance structure and financial performance of listed Spanish companies. The effectiveness of the board of directors is analyzed through the use of different variables: size, composition, duality, number of annual meetings and busyness of the directors. The financial performance is measured by return on assets (ROA), return on equity (ROE) and Tobin's Q.Design/methodology/approach– Our study is addressed through the use of a multi-theoretical approach followed by an empirical analysis. Schematic literature review serves as a basis for setting our hypotheses. We conduct the empirical part of the study by applying these to the listed companies in the Madrid Stock Exchange. An econometric model (multiple regression) is used to test the relation between board structure and financial performance.Findings– Empirical: We conclude that in the three estimated models, two of the dependent variables, ROE and ROA, have an explanatory value. The relationship between the number of the boards of directors' meetings and performance has proved to be negative. Theoretical: Ample literature on corporate governance leads to two conclusions: First, corporative–financial relations must be studied by a multi-theoretical approach. Second, future research must be made only on specific studies coincident with the majority of their characteristics (country, type of firm, type of statistical model […]).Research limitations/implications– Future research will try to cover gaps, expanding this study in both space and time.Practical implications– The number of Spanish companies' boards meetings is very high. As shown in our study, holding more than one meeting a month does not guarantee greater financial returns; the board can effectively establish its strategic lines of business by meeting up to 12 times per year.Social implications– The results show a negative relationship between ROE and the number of meetings, which may be linked to the country's business culture, which traditionally has a higher number of annual meetings when compared to neighboring countries. Perhaps, this is an indicative symptom of the inefficiency associated with the Spanish system.Originality/value– Theoretical review is performed with two aims: first, to establish our research hypotheses, and second, to reflect on future research by fine-tuning the abundant previous studies.
This article responds to Professor Romano's piece in this issue. It concerns our ongoing debate with regard to the desirability of permitting issuers to choose the securities regulation regime by which they are bound. Romano favors issuer choice, arguing that it would result in jurisdictional competition to offer issuers share value maximizing regulations. I, in contrast, believe that abandoning the current mandatory system of federal securities disclosure would likely lower, not increase, US welfare. Each issuer, I argue, would select a regime requiring a level of disclosure less than is socially optimal because its private costs of disclosure would be greater than the social costs of such disclosure. Professor Romano and I agree on most of the basic analytic building blocks for deciding whether issuer choice is a desirable reform: belief in analyzing the problem in terms of the broadly accepted principles of modem financial economics; recognition that disclosure has costs as well as benefits; and acknowledgment that incentives exist for issuers to provide at least some disclosure. We nevertheless reach the opposite conclusion on the desirability of issuer choice. To start, Romano believes that issuers' private costs of disclosure will not generally be greater than the social costs of such disclosure, whereas I show they will be. Romano argues as well that this is a special case in which any divergence of private and social costs that does exist will not lead to a market failure, at least one possibly correctable by public regulation. I show her argument to be unpersuasive. Finally, Romano interprets the existing empirical evidence as proving mandatory disclosure's lack of social value, while I show that the evidence in fact does not point in either direction. Where, as here, the theoretical case for the existence of a market failure is strong and the current program for dealing with it is widely admired, the advocate of change should have the burden of proof. Professor Romano has not met this burden. If she is serious about advancing her proposal for issuer choice, she needs to show that despite the market failure inherent in issuer choice, there is inevitably an even greater failure in the regulatory response. Absent such a showing, mandatory disclosure should be retained.
Corporate law increasingly paid attention to the disclosure and publication of information on the governance and ownership of joint-stock corporations. This paper on the one hand gives an overview of mandatory disclosure and publication requirements for joint-stock companies in the corporate legislation of Belgium, France, Germany, the Netherlands, Spain and the United Kingdom from the beginning of the nineteenth century until the interwar period. We argue that changes over time were consequence of a new approach to investor protection which coincided with transition to a concessionary regime to general incorporation and that differences between countries with different legal traditions were minimal. On the other hand, references to official publications which contained constitutional documents and information on governance and ownership are provided in an appendix.
The issue about debt as part of capital structure is unclear in context of trade off theory and pecking order theory in term to identify whether it is just a policy or requirement for the firms. The objective of this study is to identify the underlie theories on firms capital structure with its determinant. This study conducts logistic regression with sample of 148 public firms listed in Indonesia Stock Exchange for period of 2011 to 2015. The result of analysis shows profitability, firm size, tangibility, and share price have relationship with capital structure. On these results, the study reports firms with higher total debt ratio shall prefer pecking order model in determining capital structures, and firms with higher long term debt ratio shall prefer pecking order model although the result indicates the agency conflict plays role in determining capital structures, while firms with lower total debt ratio and firms with lower long term debt ratio shall prefer trade off model for capital structures. ; peer-reviewed
In recent years, several countries have enacted guidelines and/or mandatory laws to increase the presence of women on the boards of companies. Through these regulatory interventions, the aim is to eradicate the social and labor grievances that women have traditionally experienced and which has relegated them to smaller-scale jobs. Nevertheless, and despite the advances achieved, the female representation in the boardroom remains far from the desired levels. In this context, it is now necessary to enhance the advantages of board gender diversity from both ethical and economic points of view. This article examines the relation between board gender diversity and economic results in Spain: the second country in the world to legally require gender quotas in boardrooms and historically characterized by a minimal female participation in the workforce. Based on a sample of 125 non-financial firms listed on the Madrid Stock Exchange from 2005 to 2009, our findings show that in the period analyzed the increase of the number of women on boards was over 98 %. This suggests that compulsory legislation offers an efficient framework to execute the recommendation of Spanish codes of good governance by means of the increase in the number of women in the boards of firms. Furthermore, we find that the increase in the number of women on the boards is positively related to higher economic results. Therefore, both results suggest that gender diversity in boardrooms should be incremented, mandatory laws being a key factor to do so.
This article has addressed the question of who should regulate insider trading in transactions in this increasingly globalizing economy. Except in those instances where the policy underlying them is fundamentally unsound, an analysis of the various rationales as to why insider trading should or should not be banned all point to the same striking conclusion. A regulating country has a high degree of interest in imposing its insider trading regime on transactions in the shares of issuers of its nationality, wherever they occur and whomever they involve. The regulating country has, at most, a much lower degree of interest in imposing its regime on any other transactions, even if they occur on its exchanges and between its residents. This also, upon examination, turns out to be the best approach to regulatory reach in terms of maximizing global economic welfare. This approach to regulatory reach is the best available for the medium-term future. It obviously represents a significant departure from the current emphasis on the place of the transaction and the country in which the outsider resides, an emphasis driven by concerns of investor protection. It is likely, however, that national governments will move in the direction recommended as it becomes more and more difficult to identify where a transaction actually takes place, and as policymakers' understanding of modern financial economics increases. In the longer-term future, increases in transnational portfolio investment and transnational direct investment may render the recommended approach unworkable. An increasingly larger proportion of the world's production will be undertaken by issuers with no clear national center of gravity. Arrival at this point of unworkability, rather than indicating the need for a new principle to determine the reach of national regulation, will signal that the entire system of national-level regulation of corporate law and insider trading will have become obsolete.
I.1 Motivation Exchange rates are a key issue in international economics and politics. While the determinants of exchange rates have been extensively studied in previous works, this dissertation contributes to the literature by deriving exchange rate expectations from stock market (ADR) data and analyzing their determinants. This exercise is done for three cases where one has to resort to exchange rate expectations since the national exchange rate is either manipulated by the central bank (the first paper in Chapter II), fixed in pegged exchange rate regimes (the second paper in Chapter III), or not existent as the considered country is part of a currency union and therefore has no national currency (the third paper in Chapter IV). The first paper presented in Chapter II analyzes exchange rate expectations for the case of China in the period 1998-2009 in order to test standard exchange rate theories. American officials repeatedly accused China of systematically undervaluing its currency against the U.S. dollar , which produces political tensions between both countries. A recent climax in this dispute was reached on September 28, 2010, when the House of Representatives passed the Currency Reform for Fair Trade Act, which would allow the imposition of import duties for countries with undervalued currencies, namely China. Although this bill did not pass the Senate, Chinese officials clearly opposed the bill arguing against significant undervaluation of the yuan and in favor of political opportunism of U.S. officials. As the assessments of a fair exchange rate significantly differ among officials of both countries, the Chinese-American exchange rate dispute continues. Measuring the development of market determined exchange rate expectations may help to find a compromise in this international political dispute and knowing the determinants of these expectations may help to identify macroeconomic policies necessary to influence future exchange rates. The second paper presented in Chapter III investigates the development of exchange rate expectations and their determinants for the currency crisis episodes in Argentina (2001-2002), Malaysia (1998-1999), and Venezuela (1994-1996 and 2003-2007). Large devaluations of Southeast Asian and Latin American currencies were to be observed during the currency crises in the 1990's and at the beginning of the last decade. Due to an appreciation of foreign currency denominated debt, capital withdrawals, and bank runs, for example, currency crises typically lead to significant output losses in the affected economies (Hutchison and Noy, 2002). Avoiding currency crisis outbreaks has therefore become one of the major policy goals in many developing countries, which may explain the rapid accumulation of foreign exchange reserves aimed to fend off speculative attacks in these countries. The costs of this currency crisis prevention policy are however often overseen. Since foreign exchange reserves are typically invested in U.S. Treasuries, they yield a relatively low return compared to the high cost of domestic capital in these countries. Moreover, foreign exchange reserves may lose in value as the domestic currency appreciates against the U.S. dollar (Rodrik, 2006). An alternative way to avoid the outbreak of currency crises may be to regularly adjust the official exchange rate (typically managed by the domestic central bank) to levels in line with market expectations. Knowing market-based exchange rate expectations and their determinants may therefore be a cheaper way to avoid currency crises than holding excess amounts of foreign exchange reserves. The third paper presented in Chapter IV uses daily ADR data to analyze the determinants of the risk of withdrawals from the Economic and Monetary Union (EMU) for the five vulnerable member countries Greece, Ireland, Italy, Portugal, and Spain for the period 2007-2009. The subprime lending crisis has triggered significant financial turmoil in the EMU. Banking systems were destabilized and the governments of Greece, Ireland, and Portugal had to be bailed out. Reasserting national authority over monetary policy may help domestic policymakers to address the problems caused by banking and sovereign debt crises or an overvalued euro at national discretion. While the abandonment of fixed exchange rate regimes has so far been analyzed for countries with national currencies, the financial vulnerabilities in the EMU offer a new case to study the possibility of withdrawals from a monetary union. Although a country's membership in the EMU is typically considered irreversible, many authors agree that sovereign states can choose to leave the EMU (Cohen, 1993; Scott, 1998; Buiter, 1999; Eichengreen, 2007). The new Treaty of Lisbon now includes a provision outlining voluntary withdrawal from the Union, which may cause the members to re-think the pros and cons of remaining in the EMU. Although the European Central Bank (ECB) has implemented measures meant to support the banking sectors and governments in the EMU, autonomous national central banks would probably pursue more expansionary monetary policies. By analyzing the determinants of exchange rate expectations in the monetary union one may therefore analyze the drivers of the risk of withdrawal from the EMU. I.2 Deriving exchange rate expectations from prices of American Depositary Receipts Measuring movements in exchange rate expectations is a relatively easy task for currencies in which a liquid and free forward exchange market exists. For the cases considered in this dissertation, however, the forward exchange market either produces bad forecasts or does not even exist. For the case of China, the yuan/U.S. dollar forward exchange rate is most likely managed by the Chinese central bank in the course of its foreign exchange market intervention policies, which hampers its ability to provide good signals for the future spot market exchange rate (see, for example, Wang, 2010). For the considered member countries of the EMU, no national currencies exist and consequently forward exchange rates cannot be used. For the case of the currency crisis episodes studied in this dissertation, one could use regression-based forecasting models that employ data on macroeconomic variables in order to produce currency crisis signals (see, among others, Eichengreen et al., 1995; Frankel and Rose, 1996; Kaminsky et al., 1998; Kaminsky and Reinhart, 1999; Karmann et al., 2002). The drawback of these approaches is the nature of macroeconomic data used, which enables one to create only monthly or quarterly crisis signals based on backward-looking data. In this dissertation I use stock market data to derive exchange rate expectations, which has several advantages compared to existing approaches. First of all, the prices of the considered stocks are most probably not manipulated by central bank interventions since these stocks are traded in the United States, which enables the derivation of exchange rate expectations formed under free market conditions (also for China). The used stock market data is available for the considered EMU member countries, which facilitates the analysis of the risk of withdrawals from the EMU. Moreover, stock market data is forward-looking and available on a daily basis, which enables the derivation of more accurate and up-to-date currency crisis signals for the considered crisis episodes. In order to derive exchange rate expectations I use data on a particular type of stock called American Depositary Receipt (ADR). An ADR is a financial instrument for foreign companies to list their shares at stock exchanges in the Unites States. An ADR represents the ownership of a specific number of underlying shares of a company in the home market on which the ADR is written. While the underlying stock is denominated in the currency and traded at the stock exchange of the home market, the ADR is denominated in U.S. dollars and traded at a U.S. stock exchange. Since both types of stocks of the same company generate identical cash flows and incorporate equivalent rights and dividend claims, cross-border arbitrage implies that the ADR and its underlying stock have the same price when adjusted for the current exchange rate. When capital controls or ownership restrictions are implemented, cross-border arbitrage is not possible and the law of one price is not binding. In such an environment, information efficiency suggests that the relative prices of ADRs and their underlying stocks – which only differ with respect to the currency they are denominated in – will signal exchange rate expectations of stock market investors. Using data on relative prices (or returns) of ADRs and their underlying stocks and the current exchange rate I can calculate measures for exchange rate expectations of stock market investors. Although the papers presented in this dissertation differ with respect to the considered companies, countries, and time periods, each paper uses the same kind of data and a similar methodology to derive exchange rate expectations – relative prices or returns of ADRs and their corresponding underlying stocks. In each paper I use a panel regression framework in order to analyze the determinants of exchange rate expectations. Each of the included papers focuses on a distinct facet of exchange rate expectations. The first paper focuses on standard exchange rate theories such as the relative purchasing power parity or the uncovered interest rate parity in order to analyze the factors that drive exchange rate expectations in general. The second paper studies the determinants of currency crisis expectations. The third paper analyzes the determinants of the risk of withdrawals from the EMU as expected by ADR market investors. I.3 Contribution to the literature This dissertation adds to two strands of the literature. First, it contributes to a literature that studies the determinants of exchange rates, currency crisis outbreaks, and risk of withdrawal from the EMU. The first paper (Chapter II) contributes to a vast literature on the determinants of exchange rates. An incomplete list of exchange rate determinants analyzed in the literature includes: labor productivity (Chinn, 2000; Cheung et al., 2007); inflation rates (Lothian and Taylor, 1996; Taylor et al., 2001); interest rates (Froot and Thaler, 1990; Chinn, 2006); overvaluation of the domestic currency (Glick and Rose, 1999; Corsetti et al., 2000); or export growth (Williamson, 1994; Isard, 2007). I study the impact of these macroeconomic fundamentals on ADR investors' exchange rate expectations for China. China makes a good case to study standard exchange rate theories since the Chinese central bank manages the official yuan/U.S. dollar exchange rate, which therefore reacts much less to changes in macroeconomic fundamentals than is suggested by theory. Using ADR market data, I can test exchange rate theories for the Chinese peg/managed float regime under free market conditions. The second paper (Chapter III) contributes to a literature, which analyzes the determinants of currency crisis outbreaks (Eichengreen et al., 1995; Kaminsky and Reinhart, 1999; Karmann et al., 2002). Existing papers employ low-frequent and backward-looking macroeconomic data to forecast currency crises. This dissertation uses ADR market data to derive more accurate and up-to-date currency crisis signals on a daily basis. Moreover, the determinants of currency crisis expectations, such as banking or sovereign debt crisis risk, can be studied using daily market-based risk proxies. The third paper (Chapter IV) contributes to a literature on the sustainability of the EMU. Several papers discuss the possibility of withdrawal from the EMU (Cohen, 1993; Scott, 1998; Buiter, 1999; Eichengreen, 2007). I present empirical evidence that daily ADR market data reflects the risk that vulnerable member countries may leave the EMU and analyzes which determinants drive this withdrawal risk perceived by ADR investors. Second, this dissertation contributes to the literature on the pricing of ADRs. A common finding in the literature is that the outbreak of a currency crisis negatively affects the returns of U.S. dollar-denominated ADRs as the devaluation of the local currency depresses the dollar value of the underlying stock (see, for example, Bailey et al., 2000; Kim et al., 2000; Bin et al., 2004). Several papers find that the introduction of capital controls (typically meant to prevent a currency crisis outbreak) can lead to a permanent violation of the law of one price between ADRs and their underlying stocks since cross-border arbitrage cannot take place (Melvin, 2003; Levy Yeyati et al., 2004, 2009; Auguste et al., 2006). Arquette et al. (2008) and Burdekin and Redfern (2009) find that the price spreads of Chinese cross-listed stocks are significantly driven by market-traded forward exchange rates. This dissertation builds on these findings and uses the relative prices (or returns) of ADRs and their underlying stocks to derive exchange rate expectations. I present empirical evidence that ADR investors' exchange rate expectations are driven by theory-based determinants of exchange rates, currency crisis outbreaks, or the risk of withdrawal from the EMU. This analysis therefore provides new insights into the price (return) determinants of ADRs. I.4 Main findings and policy implications The findings of this dissertation may broaden the understanding of exchanger rate expectations. The results of the first paper (Chapter II) suggest that stock market investors form their exchange rate expectations in accordance with standard exchange rate theories. Based on a monthly panel data set comprised of 22 ADR/underlying stock pairs and 52 H-share/underlying stock pairs from December 1998 to February 2009 I find that stock market investors expect more yuan appreciation against the U.S. dollar: if the yuan's overvaluation decreases (the incentive of competitive devaluation); if the inflation differential vis-à-vis the United States falls (relative purchasing power parity); if the productivity growth in China accelerates relative to the United States (the Harrod-Balassa-Samuelson effect); if the Chinese interest rate differential vis-à-vis the United States decreases (uncovered interest rate parity); when Chinese domestic credit relative to GDP decreases (lower risk of a twin banking and currency crisis); or, if Chinese sovereign bond yields fall (lower risk of a twin sovereign debt and currency crisis), ceteris paribus. These findings suggest that the theoretical links between macroeconomic variables and exchange rates in most cases also apply to exchange rate expectations. In this way, the results support the validity of many exchange rate theories and substantiate the rationality of stock market investors' expectations. This approach (based on stock prices formed under free market conditions) provides an opportunity to test exchange rate theories in managed floating regimes, where the official exchange rate is manipulated by the central bank and does therefore not necessarily respond to changes in macroeconomic fundamentals. Moreover, I use a rolling regressions forecasting framework in order to evaluate the quality of exchange rate expectations. I find that exchange rate expectations drawn from the ADR and H-share market have a better ability to predict changes in the yuan/U.S. dollar exchange rate than the random walk or forward exchange rates, at least at forecast horizons longer than one year. The People's Bank of China may take advantage of ADR and H-share based exchange rate expectations in order to determine possible misalignments of the yuan/U.S. dollar exchange rate. In this way, the Chinese central bank may improve the timing and intensity of foreign exchange market interventions meant to manipulate the yuan/U.S. dollar exchange rate. The second paper (Chapter III) focuses on the derivation and determination of currency crisis signals formed by ADR market investors. Using daily data on 17 ADR/underlying stock pairs for the capital control episodes in Argentina (2001-2002), Malaysia (1998-1999), and Venezuela (1994-1996 and 2003-2007) we find that ADR investors anticipate currency crises or realignments well before they actually occur. Policymakers could use ADR investors' up-to-date assessment of the peg's sustainability in order to identify currency crisis risk earlier and to take the necessary steps to realign an (unsustainable) peg rate before a crisis breaks out. In this way, they could prevent the outbreaks of damaging currency crises without holding excess amounts of costly foreign exchange reserves. Using panel regressions we find that ADR investors anticipate a higher currency crisis risk when export commodity prices fall, the currencies of trading partners depreciate, sovereign bonds yield spreads rise, and interest rate spreads increase. These findings suggest that ADR investors' currency crisis expectations are based on currency crisis theories even on a daily basis underlining the validity of these theories. The third paper (Chapter IV) studies a particular form of currency crisis risk: the risk that vulnerable member countries could leave the EMU. I use a multifactor pricing model to test whether the financial vulnerability measures assumed to reflect the incentives of national governments to withdraw from the EMU (banking crisis risk, sovereign debt crisis risk, and overvaluation of the euro) are priced in ADR returns. Using daily data on 22 ADR/underlying stock pairs of Greece, Ireland, Italy, Portugal, and Spain in the period January 2007 to March 2009 I find that ADR investors perceive a higher risk of withdrawal (priced in ADR returns) when the risk of banking and sovereign debt crisis and the overvaluation of the euro increase. Policymakers could use ADR market data in order to assess the stability of the EMU. Higher correlations between ADR returns and currency crisis risk factors would suggest a higher risk of withdrawals from the EMU. In such a case, financial vulnerabilities may be addressed within the EMU in order to preserve the integrity of the eurozone. However, time will show how long the policymakers in the EMU will continue with the implementation of even more anti-crisis measures. Growing controversies on the ECB's sovereign bond purchases and the bailouts for Greece, Ireland and Portugal cast doubt on the sustainability of the EMU in its current form.
A law, business, or public policy student entering the field of international finance will have a substantial advantage if she takes a course using the Scott and Wellons book entitled International Finance: Transactions, Policy, and Regulations. Most practitioners already working in the field will also find it useful reading since few of them know the range of institutional detail provided by these materials. The book is insufficiently comprehensive, however, to become the kind of classic that defines a field. Nor, with this limited focus, lack of bibliography, and lack of index, is it likely to become a standard reference work. Nevertheless, it is more than just another casebook. Its clear and concise materials illuminate the often mysterious and arcane details of the institutions of international finance and will open up a world about which many, absent its publication, would have remained ignorant. A future edition with a broadened focus would make the book that much more influential.
Abstract: The studies about Abnormal Return had been studied by many researchers in their study. Researchers want to know the factors that driven the existence of Abnormal Return in an investment decision. One of the factor is the investors' overreaction towards the financial report of the company. Therefore, this study was condusted to examine the impact of the accounting information to the Abnormal Return of the company that go public during the period from 2013-2017. This study was aim to describe the effect of the selected accounting information to the Abnormal Return of the company that go public during the period from 2013-2017. The sample that were taken in this study consist of 97 samples which after deleting several outliers, the final sample that were observed consist of 64 samples. The accounting information that were used as the independent variables to determine the Abnormal Return were Price to Earning Ratio, Return on Equity, Firm Size, Book to Market Ratio, and Debt to Equity Ratio. The analysis method that were used was multiple regression analysis and using Microsoft Excel and SPSS as the tool of analysis. The result of the study showed that from the five independent variables, three of them have a significant effect, meanwhile the other two don't have significant effect. Return on Equity, Firm Size, and Book to Market Ratio have a positive effect to the Abnormal Return and significant at the 5% level of significance. 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Debate over section 16(b) has generated more heat than light. Critics assert that it is totally ineffective in combating insider trading because all that an insider needs to do to avoid its bite is to wait six months before reversing the trade. Supporters of section 16(b) ignore this criticism and assert that anything but the broadest application of the statute will impede the war against insider trading. The theory developed here refines and focuses this debate. It shows that a penalty on short-swing trading, by prolonging the period of dediversification, does reduce trades based on inside information. It also shows that the penalty has costs: it reduces the attractiveness of management share ownership and share-price-based compensation and detracts from their effectiveness as methods of reducing agency costs. The theory does not definitely answer the question whether section 16(b) should be retained. It does, however, point to the critical factors for making that determination: one's assessments of the harm, if any, that results from insider trading and of the extent to which lower levels of share ownership and share-price-based compensation increase agency costs. It also identifies the minimum characteristics necessary to justify inclusion of a class of paired transactions within section 16(b)'s reach if the statute is retained: the class must contain a larger portion of potential transactions motivated by inside information than officer-and-director transactions generally. This rule of statutory reach is important. Whatever one's individual assessments of the factors cited above, section 16(b) is unlikely to be repealed in the foreseeable future. Public sentiment against insider trading is sufficiently strong that a proposal to eliminate the only provision in the Federal securities law that explicitly deals with such trading would meet overwhelming political opposition. Thus we must be sure that this rule of thumb is no cruder than it needs to be. A review of judicial and SEC decisionmaking shows there is significant room for improvement.