Modigliani's brother, Sharpe, works for a large joint stock bank. Sharpe told Modigliani that his bank...

Modigliani's brother, Sharpe, works for a large joint stock bank. Sharpe told Modigliani that his bank is about to announce the loss of a major client. Modigliani has a substantial investment in the stock of the bank.

Note: Modigliani quickly sells his stock before this information is made public.

a) Do you approve/disapprove of the action? Why?

b) Would you do it yourself? Do you think others would do it? Why or why not?

Solutions

Expert Solution

a) I would disapprove of this action of Modigliani because it is an action which is dependent upon insider trading which is strictly prohibited and which is a punishable offence under various securities laws in the country so I would refrain from acting onto such news which are price sensitive informations obtained through an insider and which would be injurious to overall ethical standards and the employee associated with the company who in this case is brother, would be legally penalised for sharing of an insider information that can cause significant price damage to the stock.

b).I would have refrained from selling this stock based upon the news of loss of a particular client because I generally do not invest based upon short term events and my investments are highly dependent on the long-term and I ignore all such noise in the short run to gain from the long term price action, so I would not have sold the stock and I would have stayed with my investment as it is completely ethical to my beliefs and ethical to the beliefs of society as well as it is legal.

I think that others will sell the stock of the company as they would be highly terrified by such negative news and they will feel that it can cause significant damage to the overall portfolio value so they would be likely to react onto such news before any price damage is done, and they would like to get away from stock because most people are highly profit driven and they will act upon this information obtained through any insider by selling the stock to protect their investment and the rate of return, before any substantial damage is done to the stock because of this news.

jeff jeffy answered 1 year ago

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