A large Canadian public company announced that its revenues and earnings for the quarter ended March 31, 20x1, would be substantially below analysts' estimates. Its share price promptly fell by 23% on the Toronto Stock Exchange. During January 20x1, the sale of over 5 million of the company's shares by an inside director had been widely reported in the financial media. The March 20x1 announcement of lower revenues and earnings immediately led to charges by the media that the director had taken advantage of  inside information when he decided to sell his shares in January

Explain which type of information asymmetry is implied by these media charges and indicate how shareholders and the firm's share price are predicted to respond

 

Answer rating: 100% (QA)

The media charges imply the presence of adverse selection type of information asymmetry in this scenario Adverse selection occurs when one party in a ... View the full answer