Comments welcome Insider Trading and Corporate Governance in Latin America: A Sequential Trade Model Approach*

Unlike outside investors, controlling groups have the option to trade on inside information, and can exercise it at the expense of the former. We compute informed trading probabilities (ITP) for the universe of liquid stocks from seven Latin American countries, trading both at home and as ADRs, and apply them to address corporate governance questions. We find substantial heterogeneity of ITP within a given institutional environment. Nevertheless, we can identify significant differences in mean ITP across volume ranges, countries, and security types. ITP has an intuitively appealing correlation with some (but not all) of the country-wide investor protection variables used in the literature. We find significant increases in ITP just before public corporate announcements, as if privately-informed agents were exploiting their privilege when it is most valuable. ITP is priced in the market: companies with higher ITPs fetch lower Tobins qs. We conclude that Informed Trading Probability proxies for unobservable corporate governance quality as the heterogeneity of firm behavior seems to be recognized by the market and priced accordingly