98 Journal of Applied Business and Economics Vol. 21(3) 2019 A Test of Managerial Discretion and Market Efficiency in the Public Venture Capital Industry Hannah Rozen Fairleigh Dickinson University Sarah Hertz Empire State College State University of New York In the public venture capital industry, firms are owned by institutional investors and other stakeholders possessing inside information that may lead to the leakage of company news before an event actually occurs. Using an event study, we examine the potential effect insiders have on the market through stock trading. We study trading volume, absolute percent changes in trading volume and percent changes in price five days prior and post an important news event. In cases where there is a large increase in trading volume before an event is reported in the news, it is presumed that news leakage has occurred. Furthermore, it is important to analyze whether share prices impound this information rendering the market efficient, or whether prices take time to “catch up” in which case the public venture capital market would be considered only semi-strong efficient. INTRODUCTION Insiders are defined as officers, directors, other key employees, and shareholders holding more than ten percent of any equity class. All of these are prohibited from trading on undisclosed “material” information. To be legal, insiders only have to report their holdings within the first ten days of the month following the month of the trade (Persons, 1997). Insider transactions are published on the SEC’s online insider trading report. Shortly afterwards, the information is published in the Wall Street Journal and other publications. Chang and Suk (1998) find that there is a significant share price reaction even after the announcement in the Wall Street Journal. They suggest that the SEC online report is only read by a small number of investors, whereas the Wall Street Journal is read by a much larger number of investors. News leakage occurs when management or large investors “leak” that an event is about to happen. Due to the fact that these individuals often own large blocks of shares and options, they will often trade based on this information. They may do so legally, provided they follow insider trading guidelines which requires reporting their trades to the SEC. Many investors and traders use this information to identify companies with investment potential, assuming that if those in the know are buying the stock, their strategy should be replicated. 1 In the United States, new information is only gradually reflected in stock prices and there is leakage of price-sensitive information. Dedman (2004) finds that stock prices start