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Executive Social Networks, Insider Trading and Tunneling in Israel Dustin Plotnick and Dr. Gitit Gur-Gershgoren January 2012   Business | Israel | Technology Publisher: Koret-Milken Institute Fellows Program

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.

The authors explore the extent of that problem in different types of firms, tracing its impact on spreads. In this working paper from the Koret-Milken Institute Fellows Program, they find strong evidence that the possibility of insider trading by financially connected directors in business group firms actually serves to reduce price uncertainty in those firms.