Use and Abuse of Privileged Information in Italian Listed Companies

Abstract

Privileged information has significant importance to listed companies, given both the extent of the markets in which it is used and the relevant effects that it can produce on the prices of financial instruments. The term “privileged information” means information that has not yet been made known to the public, which, if disclosed, is able to affect significantly the prices of the securities of listed issuers. This article aims to prove that in many cases, the effects of privileged information can be adequately represented in financial statements, despite their “confidential” nature. For this purpose, this research proposes the existence of a relationship—which can be virtuous or vicious—between financial statements and privileged information. In order to demonstate this thesis, the author carried out an empirical survey concerning both the economic and the legal sector. For the first one, the research considered the price-sensitive information published by companies listed on the Italian Stock Exchange during the first half of 2018, and the result shows that a lot of privileged information is able to generate accounting effects; for the second one, the empirical survey analyzed some significant judgments passed by the Italian Court of Cassation in the 2000s which confirm the companies’ violation of the duty to present privileged information in financial statements. Shareholders are entitled to the residual real or physical capital of the firm. Valuation rules translate this entitlement into units of money, say dollars. All valuation rules are imperfect and vulnerable to manipulation. Fortunately, the choice of a valuation rule affects only one of the five functions of accounting. The data provided for the functioning of equity markets are based largely on valuation rules. The other four functions of accounting (measurement of inputs, determination of entitlements, contract performance, and provision of the common knowledge base) are largely independent of the valuation rules chosen to prepare financial statements. Valuation rules play no role in measuring inputs of agents because these are measured in physical units, nor do they determine the entitlement of any agent, except, partly, the top managers.