Insider Trading in the Brazilian Stock Market

Abstract

The development of the Brazilian stock market has raised concerns about the practice of insider information, with several cases being documented in recent years. We hypothesize that insider trading is a form of corruption. As such, the higher the corruption level in a country, the more intense insider trading practices in that country are likely to be. Brazil is in an intermediate zone of corruption, and there is a widespread feeling that the authorities do not fight insider trading efficiently enough and that the market tolerates it. Some authors argue that corruption is inversely related to education and that the struggle against corruption requires the control of public administrators, which can be exerted through voting, controlling congress, and bureaucratic procedures. There is a anthropological view in which corruption arises from an extension of the public to the private sphere as a result of cultural patterns that approximate the individual to the person. Corruption derives from existing personal relationships of the members of the State bureaucracy, implying illicit gains using public resources. In this paper, we survey the Brazilian legislation related to insider trading and present a review on empirical studies on the subject. We conclude that although an institutional framework exists in Brazil to fight insider-trading practices in the stock market, the actual success and willingness of the authorities with respect to this form of corruption is inefficient. One of the reasons for this is a long tradition of corruption culture. One cannot deny the efforts applied by CVM, Bovespa, and legislators towards increased transparency and ethical behavior, but the actual enforcement of the law against insider trading seems to require a much greater effort.

Keywords: insider trading, stock market, Brazil, corruption, regulation

JEL Classification: G14, G18, G28, K22, K42, N26