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Hot Tips, Twitter and Insider Trading, Part 2

Bruce Carton | July 21, 2009

A few weeks ago I offered the following hypothetical and questions:

An executive at publicly-traded ABC Corp. learns that his company is about to be acquired at a significant premium to its current stock price. He goes on Twitter and posts the following:

“I’m about to become a rich man. My company, ABC Corp., will be acquired next week at a 50% premium to current stock price. Shhh!!”

Here are the scenarios for discussion. Assume in each scenario that many of the followers act on the tip by buying the stock of ABC Corp. that day:

(a) Executive has 5 followers, all family members.

(b) Executive has 5 followers, all strangers.

(c) Executive has 2,000 followers.

In fact, ABC Corp. is acquired the following week and the stock jumps from $20 to $30 on the public announcement, at which time the followers who traded sell their ABC Corp. stock for a big profit. My questions for you are:

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