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Journal of Education for Business

ISSN: 0883-2323 (Print) 1940-3356 (Online) Journal homepage: http://www.tandfonline.com/loi/vjeb20

Does the Study of Business Reduce the Likelihood

of Committing Insider Trading?

Kent T. Saunders

To cite this article: Kent T. Saunders (2002) Does the Study of Business Reduce the Likelihood of Committing Insider Trading?, Journal of Education for Business, 78:2, 75-80, DOI:

10.1080/08832320209599701

To link to this article: http://dx.doi.org/10.1080/08832320209599701

Published online: 31 Mar 2010.

Submit your article to this journal

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Does the Study of Business

Reduce the Likelihood of

Committing Insider Trading?

KENTT. SAUNDERS

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Anderson University Anderson, Indiana

he Enron disaster of 2002 has

T

caused many to consider the ethics of business executives. One unethical practice that receives prominent media attention is insider trading. In this study, I investigated whether the study of business reduces the likelihood of committing insider trading. Dyl (1991) de- scribed two methods of using the 1987

Oliver Stone film

Wall Street as a case

study in ethics and provided a list of questions to ask at different stopping points during the film. In the present study, students completed a survey after watching a 15-minute clip that begins approximately 7 minutes into the film

Wall Street.‘

The film clip shows the film’s main character, Bud Fox, under financial duress. Bud comments to a colleague, “I’m tapped out. American Express has got a hit-man looking for me.” In a con- versation with his father, Bud learns some potentially valuable inside information related to Bluestar Airlines, the company his father works for. Bud’s father says that the “FAA is going to

rule.

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.

. .

This gets us out from under

suspension. We can go for the new routes to Pittsburgh and Boston. We’re gonna compete with the big guys.” Bud recognizes this as valuable information and begins to process what to do with this new knowledge. Bud asks his father, “Are you sure about this thing? The FAA announcement?’ His father notices a “mischievous look” in Bud’s

ABSTRACT. In this study, 347 students at two Christian liberal arts schools and a state university completed a survey after watching a clip from

the 1987 film

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Wall Street. The survey was given to 347 students. Seniors

were less likely to respond that they would commit insider trading than were freshmen, and students attending the Christian liberal arts schools, compared with students at the state university, were less likely to respond that they would commit insider trading.

eye. An opportunity arises the next day for Bud to use the inside information to secure a business relationship with the film character Gordon Gekko, a Wall Street tycoon. Bud tells Gekko that the airline “just got a favorable ruling on a lawsuit that even the plaintiffs don’t know about.

. . .

There is only a small float out there. You should grab it. It’s good for a 5-point pop.” The film clip concludes when Gekko calls Bud later in the day and places an order for 20.000 shares of Bluestar Airline stock.

Survey and Research Hypotheses

The four-question survey was given to 347 students at Anderson University and Ball State University in Indiana and Greenville College in Illinois during the period from December 2001 to February 2002. Anderson University and Green- ville College are both Christian liberal arts schools. For univariate comparisons,

the 347 student responses were broken down into four groups: (a) Christian liberal arts freshmen (CLAF), comprising 62 Anderson University and Greenville College freshmen in introductory business courses; (b) Christian liberal arts seniors (CLAS), comprising 67 Ander- son University and Greenville College seniors in upper-level business courses;

state university freshmen

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(SUF), com-

prising 44 Ball State University freshmen in introductory business courses; and state university seniors (SUS), comprising 57 Ball State University seniors in upper-level business courses. Of the 347 students, 117 did not fall into any of the four categories.

The first research hypothesis in this study was that the academic study of business (which includes finance, business law, etc.) would reduce the likelihood of committing insider trading- that is, CLAS and SUS would be less likely than CLAF and SUF to do the same thing as Bud. My second research hypothesis was that there would be a difference in the response patterns between the two types of schools (Christian liberal arts and state)-that is, CLAF and CLAS would respond differently from SUF and SUS, respectively.

Survey Responses and Univariate Analysis

In the survey, students circled their gender, year in school, and major. The

NovembedDecember 2002 75

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breakdown for gender and major in the four groups is listed in Table 1. There was a noticeably higher percentage of male students in SUF and SUS than in CLAF and CLAS, respectively.

The survey included questions related to how likely they and their peers would be to behave similarly to Bud. The first question was “If you were put in the same situation as Bud, would you have

done the same thing as Bud?’

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I used the

Mann-Whitney test to compare the response patterns between the groups. In Table 2, I provide the breakdown of responses for the four groups and summaries of the statistical tests.

In response to the first question, 50.0% of CLAS, compared with 40.3%

of CLAF, selected “definitely not” or “probably not.” For Question 1, however, I did not find a significant difference in the distribution between CLAS and CLAF. There was a significant difference in the distribution between SUS and SUE Slightly over one third of the seniors at the state university, compared with 11.3% of state university freshmen, selected “definitely not” or “probably not.” These two results lend some support to the research hypothesis that the study of business reduces the likelihood of committing insider trading.

I used a two-tailed test with a 5% level of significance to compare the response patterns between types of school. There were significant differ-

ences in the distribution between CLAF and SUF and in the distribution between

CLAS and SUS. Students at the Chnst- ian liberal arts schools, compared with students at the state school, were less likely to respond that they would do the same thing as Bud.

The second question in the survey was “Consider typical business students from this university. If they were put in the same situation as Bud, would they have done the same thing as Bud?’ In Table 3, I provide the breakdown of re-

sponses for the four groups and summaries of the statistical tests. For Ques- tion 2, there was no significant difference in the distributions between

CLAF and CLAS or between SUF and

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TABLE 1. Breakdown for Gender and Major for the Four Groups Please circle your gender:

Male Female

r

CLAF CLAS SUF

sus

Please circle your major: CLAF

CLAS SUF

sus

50.7 49.3 51.6 48.4 65.9 34.1 64.9 35.1

Accounting Economics Finance h -magement Marketing Other 9.0 0.0 7.5 31.3 6.0 46.3 14.5 1.6 11.3 37.1 29.0 6.5 6.8 2.3 6.8 25.0 4.5 54.5

12.3 0.0 5.3 26.3 21.1 35.1

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[image:3.612.46.570.286.640.2]

Note. CLAF = Christian liberal

arts freshmen; CLAS = Christian liberal arts seniors; SUF = state university freshmen; SUS = state university seniors. TABLE 2. Breakdown of Question 1 Responses for the Four Groups and Summaries of Statistical Tests

Question I: If you were put in the same situation as Bud, would you have done the same thing as Bud?

Definitely not Probably not Unsure Probably would Definitely would CLAF 10.4

CLAS 17.7 SUF 4.5

sus

5.3

29.9 32.3 6.8 28.1

43.3 29.0 27.3 33.3

10.4 19.4 54.5 26.3

6.0 1.6 6.8 7.0 Groups being compared

H” Mann-Whitney Z P

CLAF vs. CLAS CLAF - CLAS

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I 0 0.85 .19

SUF vs. SUS SUF - SUS I 0 2.14

.oo**

CLAF vs. SUF CLAF - SUF = 0 4 . 4 4

.oo**

CLAF vs. SUS CLAS - SUS = 0 -2.30 .01*

Note. CLAF = Christian liberal arts freshmen; CLAS = Christian liberal arts seniors; SUF = state university freshmen; SUS = state university seniors.

* p < .05. **p < .01.

76 Journal

of Education for Business [image:3.612.48.567.472.703.2]

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TABLE 3. Breakdown of Question 2 Responses for the Four Groups and Summaries of Statistical Tests

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Question 2: Consider typical business students from this university. If they were put in the same situation as Bud,

would they have done the same thing as Bud?

Definitely not Probably not Unsure Probably would Definitely would CLAF

CLAS SUF

sus

6.0 4.8 2.3 0.0

38.8 54.8 11.4 17.5

40.3 30.6 40.9 35.1

Groups being compared

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“0 Mann-Whitney Z

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P

CLAF vs. CLAS CLAF - CLAS = 0 1.52 .13 SUF vs. SUS SUF - SUS = 0 0.19 .85 CLAF vs. SUF CLAF

-

SUF = 0 -4.02

.oo**

CLAF vs. SUS CLAS - SUS = 0 -5.43

.oo**

13.4 9.7 43.2 40.4

1.5 0.0 2.3

7.0

Note. CLAF = Christian liberal arts freshmen: CLAS = Christian liberal

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arts seniors: SUF = state university freshmen; SUS = state university seniors.

**p < .01.

SUS. There was a significant difference in the distribution between CLAF and SUF and between CLAS and SUS. Stu-

dents at the Christian liberal arts schools, compared with students at the state university, were less likely to respond that their peers would do the same thing as Bud.

The third question was “Consider typical business students from this university. If they were put in the same situation as Bud, how would their business education at this university affect the likelihood that they would have done the same thing as Bud?’ Table 4 con- tains the breakdown of responses for the four groups and summaries of the statistical tests. For Question 3, there was no

significant difference in the distribution between CLAF and CLAS or between SUF and SUS. There was a significant difference in the distribution between CLAF and SUF and between CLAS and

SUS. Students at the Christian liberal

arts schools, compared with students at the state university, were more likely to respond that business education would decrease the typical students’ likelihood of doing the same thing as Bud.

Students filled in the blank with a number for the fourth question: “Con- sider 100 business students from this university. If they were put in the same situation as Bud, how many of them probably would or definitely would have done the same thing as Bud?’ In

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Table

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5 , I provide the breakdown of

TABLE 4. Breakdown of Question 3 Responses for the Four Groups and Summaries of Statistical Tests

Question 3: Consider typical business students from this university. If they were put in the same situation as Bud, how would their business education at this university affect the likelihood that they would have done the same thing as Bud?

Decrease the Increase the likelihood No effect likelihood CLAF

CLAS SUF

sus

76.1 75.8 31.8 39.3

16.4 19.4 56.8 53.6

7.5 4.8 11.4 7.1 Groups being compared

*o Mann-Whitney

2 P

CLAF vs. CLAS CLAF - CLAS = 0 -0.04 .97 SUF vs. SUS SUF - SUS = 0 0.92 .36

CLAF vs. SUF CLAF - SUF = 0 4 . 2 6

.oo**

CLAF vs. SUS CLAS - SUS = 0 -3.80 .00**

Note. CLAF = Christian liberal arts freshmen; CLAS = Christian liberal arts seniors: SUF = state university freshmen: SUS = state university seniors.

responses for the four groups and summaries of the statistical tests. For Ques- tion 4, there was no significant difference in the distribution between CLAF and CLAS or between SUF and SUS. There was a significant difference in the distributions between CLAF and SUF and between CLAS and SUS. Students at the Christian liberal arts schools, compared with students at the state university, were less likely to respond that their colleagues would do the same thing as Bud.

For students at the Christian liberal arts schools, the actual percentage who selected “probably would or definitely would” was 22%, which would be 22 of

100. For students at the state school, the actual percentage who selected “probably would or definitely would” was 46.8%. which would be 46.8 out of 100.

Self-Enhancing Bias

Manley, Russell, and Buckley (2001) found that students perceived them-

NovernbedDecember 2002 77

[image:4.612.232.564.382.532.2]

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selves as less likely than the average person to engage in unethical behavior. A similar response pattern emerged in the present data. Students who responded to Question 1 that they “definitely would” or “probably would have done the same thing as Bud,” compared with those who responded “definitely not,” “probably not,” or “unsure,” assumed that more of their colleagues would do

the same. In Table

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6, I provide the

breakdown of mean responses to Ques- tion 4 by each of the five responses to Question 1 for all Christian liberal arts students (CLA), all state university students (SU), and the entire sample (ALL).

The following is an example from Table 6. For the entire sample, students who selected “definitely would” as a response to Question 1 assumed that 59

out of 100 of their colleagues would respond “probably would or definitely would” to Question 1. In contrast, students who selected “definitely not” as a response to Question 1 assumed that 27.8 out of 100 of their colleagues would respond “probably would or def-

initely would” to Question 1.

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Multivariate Analysis

I conducted multiple regressions to control for the simultaneous effects of gender, school, major, and year in school on the response to Question 1. I conducted ordered probit regressions because of the discrete ordinal nature of the dependent variable. I used the entire sample of 347 student responses in this multivariate analysis. I ran two regressions based on the following equations:

TABLE 5. Breakdown of Question 4 Responses for the Four Groups and Summaries of Statistical Tests

Question

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4: Consider 100 business students from this university. If they were put in the same situation as Bud, how many of them probably would or definitely would have

done the same thing as Bud?

M Mdn

CLAF CLAS SUF

sus

37.5 33.3 51.8 51.1

30 30 50 50

Groups being compared

Ho Mann-Whitney

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Z P CLAF vs. CLAS CLAF - CLAS = 0 1.17 .24

SUF vs. SUS SUF - SUS = 0 0.47 .64

CLAF vs. SUF CLAF - SUF = 0 -3.10

.oo**

CLAF vs.

sus

CLAS - SUS = 0 -4.31

.oo**

Note. CLAF = Christian liberal arts freshmen; CLAS = Christian liberal arts seniors; SUF = state university freshmen; SUS = state university seniors.

Qlresponse = F(GENDER, SCHOOL,

ACCT, FINECON, MGT, MKT,

YEAR).

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Qlresponse = F(GENDER, SCHOOL, ACCT, FINECON, MGT, MKT, SOPH, JUNIOR, SENIOR).

In Table 7, I provide the definitions for each of the dependent and independent variables. The dependent variable for each regression was the response to Question 1. I used the GENDER variable to compare female students with male students. I used the SCHOOL variable to compare Christian liberal arts school students with state university students. The YEAR variable should have a negative coefficient on the basis of the research hypothesis. I used the

SOPH (sophomore), JUNIOR, and SENIOR variables to compare the responses of those students with the responses of freshmen for effect of each year in school. The SOPH, JUNIOR, and SENIOR variables should have negative coefficient estimates on the basis of the research hypothesis. I used the ACCT, FINECON (finance/economics), MGT (management), and MKT (marketing) variables to compare the responses of students in those majors with responses of the students who selected “other” for effect of each major (see Table 8 for the regression results).

The regression results indicate that the female students were significantly less likely than the male students to respond that they would do the same thing as Bud. Students attending a Christian liberal arts school were significantly less likely than students attending the state university to respond that they would do the same thing as Bud. Accounting and management majors, compared with students who selected a nonbusiness (other) major, were significantly less likely to

TABLE 6. Breakdown of Mean Question 4 Responses by Each of the Five Question 1 Responses

Question 1: If you were put in the same situation as Bud, would you have done the same thing as Bud? Question I response

Definitely not Probably not Unsure Probably would Definitely would CLA 24.8

su

37.0

ALL 27.8

25.8 42.1 39.9 54.9 30.4 47.1

48.5 59.3 55.5

48.4 64.6 59.0

Nore. CLAF = Christian liberal arts; SU = state university; ALL = entire sample. 78 Journal of Education for Business

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TABLE 7. Definitions for Each of the Dependent and Independent

Variables

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Q 1 RESPONSE

1 = Definitely not 2 = Probably not 3 = Unsure

4 = Probably would

5 = Definitely would ACCT

GENDER

1 if female 0 if male FINECON 1 if major is accounting

0 otherwise YEAR

1 if freshman 2 if sophomore 3 if junior 4 if senior

1 if major is finance 0 otherwise SOPH

1 if sophomore 0 otherwise

or economics

SCHOOL 1 if Christian

liberal arts

0 if state university MGT MKT 1 if major is 1 if major is

management marketing 0 otherwise 0 otherwise JUNIOR SENIOR

1 if junior

0 otherwise 0 otherwise

1 if senior

TABLE 8. Regression Results

Predictor Coefticient Coefticient

variable estimate

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P estimate P

CONSTANT GENDER SCHOOL ACCT FINECON MGT MKT YEAR SOPH JUNIOR

SENIOR

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N

% correctly predicted 2.17 -0.46 -0.49 -0.49 0.16 -0.34 0.07 -0.09 347 37.2

.oo**

2.05

.oo**

-0.45

.oo**

-0.49

.02* -0.49 .49 0.17 .01* -0.34

.72 0.08

.02*

-0.0 1 -0.15 -0.27 347 36.9

.oo**

.OO**

.oo**

.02* .47 .02* .70 .47 .22 .03*

respond that they would do the same thing as Bud. The result for accounting majors was interesting in light of the recent accounting scandals (e.g., Arthur Andersen). The p values for year, SOPH, JUNIOR, and SENIOR were one-tailed

p values based on the research hypothe-

sis. Year in school had the hypothesized effect, and the results were statistically significant. Seniors were significantly less likely than freshmen to respond that they would do the same thing as Bud.

Use of the Film Clip to Discuss Insider Trading

The results of this research (viewing the film clip) could be used to generate

class discussion related to insider trading. Sharpe, Alexander, and Bailey (1999) reported that the Association for Investment Management and Research defines nonpublic (inside) information

as any information about a company or the market for the company’s securities, that has not been generally disclosed to the marketplace, the dissemination of which is likely to affect significantly the market price of the company’s securities or is likely to be considered important by rea- sonable investors in determining whether to trade in such securities. (p. 772)

Sharpe, Alexander, and Bailey (1999, p. 773) stated that for the courts to find someone guilty of insider trading the person must “be in possession of inside information, be in a position of trust and

confidence, and stand to gain from the disclosure.” After viewing the clips, some students often believe that Bud has not done anything wrong and that no one was hurt. The following is a series of questions with suggested answers that can be presented to students after they have viewed the film clip and discussed the findings in the present study.

Question 1. Did Gekko want to pur- chase the shares before he knew about the FAA announcement?

Answer 1. No, “I hate airlines.” (This is a quote from the character in the film.)

Question 2. Did Gekko want to pur-

chase the shares after learning of the FAA announcement?

Answer 2. Yes, “20,000 shares at 15

118,

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318 tops.”

Question 3. Assume the shares do get a “5-point pop” from the FAA announcement. How much would Gekko profit from this information?

Answer

3 . $100,000.

Question 4. What is the percentage return from 15 3/8 to 20 3/8? Is that

return significant?

Answer 4. A return of 32.5% is a sig-

nificant return and an especially significant short-term return.

Question 5. Would the investors who sold the stock to Gekko at 15 318 have

done so if they also knew of the FAA

announcement?

Answer 5. No, not at a price of 15 318.

Question 6. Did anyone benefit or get

hurt as a result of this transaction? Answer 6. Gekko definitely benefit- ed. The sellers of the shares were hurt. The sellers unknowingly sold some- thing worth $20 for $15. Gekko in effect stole $100,000 from them.

Conclusion

The Enron disaster and prominent accounting scandals of 2002 have given

rise to a re-examination of business ethics. This research considered the question of whether the study of business reduces the likelihood of committing insider trading. Univariate and multivariate analyses lend support to the

November/December 2002 79

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hypothesis that the academic study of business reduces the likelihood of committing an unethical act. There was a difference in the response patterns between freshmen and seniors. Seniors were less likely to respond that they would commit insider trading.

There was a difference in the response patterns between the two types of schools. Students enrolled in Christ- ian liberal arts schools, compared with state university students, were less likely to do the same thing as the character Bud. Christian liberal arts students pre- dominantly believed that their business education would decrease the likelihood that they would do the same thing as

Bud. State university students predomi- nantly believed that their business education would have no effect on the likelihood of their doing as Bud did. However, seniors at the state university, compared with freshmen at the state university, were significantly less likely

to do the same thing as Bud.

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NOTE

1. The instructor should review the movie before showing it in class. The movie is rated “R,” and there is vulgar language throughout it.

Additionally, there is a scene of brief nudity approximately 14 minutes into the film after Bud has a talk with his father and a picture of a bridge appears.

REFERENCES ACKNOWLEDGMENT

I would like to thank Ken Armstrong, Cecil Bohanon, Chris Caldwell, Michael Goldsby, Becky Haskett, Susan Koebcke, Frank Pianki, Wally Richardson, Larry Sayler for administer- ing or allowing me to administer the survey in their courses. I would like to thank Cindy Peck, Barry Ritchey, and the editors for their helpful comments and suggestions.

Dyl, E. A. (1991). Wall Street: A case i n ethics.