Korea Capital Market Institute

Voices have been raised about the need for building trust in Korea’s capital markets since the Hanmi Pharmaceutical insider trading scandal shocked the markets in 2016. This article examines the extent to which undisclosed information is being used in the capital markets through a statistical analysis. The analysis results show that the number of trades on nonpublic information before it is made public is smaller than we thought. Yet, small firms listed on the KOSDAQ market generated abnormal stock returns before the disclosure. Their statistical characteristics lead to suspicion of unfair trading practices on the basis of undisclosed information. This underscores the need for such small firms to enhance awareness of the illegality of the use of undisclosed information. Korea seems to be on the right track, considering the recent policy efforts, e.g., training for company executives and employees on preventing unfair trading practices, and discussions about the introduction of stiffer penalties. In particular, the preventive training and efforts should be geared more towards small-cap companies in the KOSDAQ market.