Question

In: Finance

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.


Related Solutions

business law 21. Sunil and his brother Leandro set up an investment account with a bank,...
business law 21. Sunil and his brother Leandro set up an investment account with a bank, as Tenants in Common. Each puts $25,000 into the account, and they buy and sell stock together, splitting all interest and dividend income equally, and sharing any losses equally. After about thirty years of doing this, the account has grown to a total of about $200,000. Sunil got married, and had one child, Arjun. Sunil’s wife unfortunately died in 2015. Leandro has never married,...
11-) Don works for the currency trading unit of a large bank in London. He speculates...
11-) Don works for the currency trading unit of a large bank in London. He speculates that in the coming months the dollar will rise sharply vs. the pound. What should Don do to act on his speculation? Select one: a. Sell a put on the pound. b. Buy a put on the pound. c. Buy a call on the pound. d. Sell a call on the pound. 12-) Interest spreads in the eurocurrency market are small for many reasons...
Staci Sutter works as an analyst for Independent Investment Bank Shares (IIBS), which is a large...
Staci Sutter works as an analyst for Independent Investment Bank Shares (IIBS), which is a large investment banking organization. She has been evaluating an initial public offering (IPO) that IIBS is handling for a technology company named ProTech Incorporated. Staci is essentially finished with her analysis, and she is ready to estimate the price for which the stock should be offered when it is issued next week. According to her analysis, Staci has concluded that ProTech is financially strong and...
Steven Pinker is a 48-year-old bank manager. His wife Carol, 43 years old, works part-time at...
Steven Pinker is a 48-year-old bank manager. His wife Carol, 43 years old, works part-time at a daycare. They have three children, 19-year-old Sam, 16-year-old Sarah and 14-year-old Michael. All three children live with them. Steven's only income during the year was $115,000 from employment, Carol earned $12,000 from the daycare, Sam earned $10,000 from his job at Starbucks and Sarah earned $4,000 working part-time at McDonald's. Carol's 72-year-old mother, Ethel, also lives with the family. Ethel had an income...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT