Forensic Finance

Insider Trading
Insider trading, a common focus in forensic finance, involves the use of non-public, material information by corporate insiders or their associates to profit from securities trading. Research has shown that registered insider trades can yield abnormal returns, particularly in non-routine transactions, which suggests the presence of opportunistic insider behavior. However, insider trading is difficult to detect, especially when it involves unregistered trades or trades by foreign executives, leading to ongoing debates and new regulatory measures aimed at curbing these practices. Despite its challenges, forensic finance plays a crucial role in uncovering and addressing insider trading activities across different markets.
Overview
Insider trading is a significant focus in forensic finance, where it is closely examined through both registered and unregistered insider trades. Research has identified that registered insider trades, particularly those that are non-routine, often result in abnormal returns, indicating the potential for opportunistic behavior by insiders. However, insider trading is challenging to detect, especially when it involves unregistered trades or when insiders use sophisticated methods like derivatives to leverage their inside knowledge. The complexity of detecting such trades has led to ongoing research and debate within the field.
The difficulties in identifying insider trading are compounded when it involves foreign executives of U.S.-listed firms, who may exploit their inside information without being subject to the same level of scrutiny as domestic executives. Regulatory bodies, such as the SEC, have implemented new rules requiring electronic submission of certain forms to address these challenges, but enforcement remains a key issue. Research shows that insider trading laws are not uniformly enforced across countries, leading to variations in market behavior and the cost of capital, especially in developing markets where data is often scarce.
Forensic finance continues to explore various angles of insider trading, including the connections between insiders and other market participants, such as institutional investors and brokers. Studies have shown that some investment banks and brokers may engage in informed trading, leveraging inside information from their corporate clients. However, not all research supports this view, with some studies finding no evidence of such practices. These mixed results highlight the ongoing need for rigorous forensic analysis to uncover and understand the true extent of insider trading in global financial markets.