Imax Corporation is a large entertainment technology company, with headquarters in New York and Toronto, and theatres worldwide. Its share price, which was as high as Can.$ 13.89 on the Toronto Stock Exchange in 2003, had fallen to a low of $ 5.50 following its reporting of a loss, in accordance with U. S. GAAP, of US$ 896,000 for the first quarter of 2004. This compared with a profit of over $ 2.4 million for the same quarter of 2003.

On May 14, 2004 (i. e., after reporting the first- quarter loss), The Globe and Mail reported that a group of senior Imax executives had bought about US$ 1 million of Imax shares on the open market. The company’s share price immediately rose by Can. $1.17 to $ 7.20.

Imax later reported earnings for the second quarter of 2004 of US$ 1.552 million. However, its problems were not over. In March 2007, the company announced that it was expanding a probe into its accounting for the previous six years, following SEC and OSC investigations into its revenue recognition practices. The company also indicated that it had misclassified some expenses as capital. Imax shares were threatened with delisting by NASDAQ, the exchange on which its shares traded in the United States, since the probe delayed the filing of its financial statements. The filing delay also violated the covenants on its long- term debt. Imax shares fell by over 6% to Can. $5.79 on the Toronto Stock Exchange on the day following its announcement.

Required

a. What apparent information was conveyed to the market by the executive share purchase? Did the share repurchase constitute a credible signal at the time? Explain why or why not.

b. What market failures are revealed by the subsequent probes into Imax’s accounting policies? Explain.

c. Why would the Imax executives have bought shares when they must have known about the opportunistic management of its reported earnings?