ImClone Systems receives word that their experimental drug has surprisingly failed to get approval from the Food and Drug Administration, so it cannot be prescribed to patients.

(a) Upon this becoming public, should this increase or decrease its stock price? Explain using components of the generalized dividend valuation model.

(b) Martha Stewart was convicted of insider trading of ImClone stock in 2003, which means she was found guilty of acting on this information before it became public. Based on what youve learned in class, why would private information be valuable for people buying and selling stocks?