Martin P. Loeb
ˇ@
Deloitte & Touche Faculty Fellow
Van Munching Hall 3351
Robert H. Smith School of Business
The University of Maryland
College Park, MD 20742, USA
Phone: (301) 405-2209

ˇ@

Book

Managing Cybersecurity Resources: A Cost-Benefit Analysis

INSIDER TRADING

AND MEAN-VARIANCE ANALYSIS

The paper contributes to the literature by developing and testing a model of insider trading behavior around the release of annual earnings information. The study hypothesizes that utility maximizing insiders with private information concerning annual earnings will increase their trading activity several weeks prior to the public release of earnings, but will refrain from trading in the period immediately preceding the earnings release. The empirical analysis, using an event study methodology, is generally consistent with the predicted behavior.

The study attempts to shed additional light on the issue of the costs and benefits of using the mean-variance criterion as opposed to stochastic dominance criteria for investment decisions. Relevant probabilities which facilitate measurement of these costs and benefits are identified. The mean-variance criterion is shown to be useful to some extent in identifying potentially optimal portfolios. However, it is shown that the informationally less demanding mean-variance criterion admits two types of errors: (i) including portfolios that no expected utility maximizing risk averters would choose, and (ii) excluding portfolios which some risk averters would find optimal. The empirical investigation also indicates that although the composition of the efficient sets appears to be unstable over time, the relationships between the efficient sets are persistent over time.

ˇ@

ˇ@