How Do Insider Trading Policies Affect the Returns to Insider Trades?

2013 ◽  
Author(s):  
Millicent Chang ◽  
Marvin Wee
Keyword(s):  
Insider Trading ◽  
Insider Trades

scholarly journals Effect of insider trading on stock characteristics

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Sudipta Kumar Nanda ◽  
Parama Barai
Keyword(s):  
Insider Trading ◽  
Abnormal Return ◽  
Investment Decision ◽  
Least Square ◽  
Content Type ◽  
Insider Trades ◽  
Different Types ◽  
Abnormal Volume ◽  
Novel Method ◽  
The Relationship

PurposeThis paper investigates if investors consider legal insider trading data while making investment decisions. If any investment decision is based on insider transactions, then it will result in abnormal stock characteristics. The purpose of this paper is to investigate if insider trading affects stock characteristics like price, return and volume. The paper further investigates the effect on stock characteristics after the trade of different types of insiders and the relationship between abnormal return and abnormal volume.Design/methodology/approachThe study uses the event study method to measure the abnormal price, return and volume. Two-stage least square regression is used to investigate the relationship between abnormal return and abnormal volume.FindingsThe insider trades affect price, return and volume. The results are identical for both buy and sell transactions. The trades of different types of insiders have diverse effects on stock characteristics. The trades of substantial shareholders give rise to the highest abnormal price and return, whereas the promoters' trades result in the highest abnormal volume. No relationship is detected between abnormal return and volume.Originality/valueA novel method to calculate the abnormal price is proposed. The effect of trading of all types of insiders on stock characteristics is analyzed. The relationship between abnormal return and abnormal volume, after an insider trade, is investigated.

scholarly journals Do Proxies for Informed Trading Measure Informed Trading? Evidence from Illegal Insider Trades

2020 ◽  
Vol 10 (3) ◽  
pp. 397-440 ◽  
Author(s):  
Kenneth R Ahern
Keyword(s):  
Insider Trading ◽  
Sampling Bias ◽  
Informed Trading ◽  
Cross Sectional ◽  
Order Imbalance ◽  
Oxford University ◽  
Insider Trades ◽  
Editorial Decision ◽  
New Evidence ◽  
Bid Ask Spreads

Abstract This paper exploits hand-collected data on illegal insider trades to provide new evidence on the ability of a host of standard measures of illiquidity to detect informed trading. Controlling for unobserved cross-sectional and time-series variation, sampling bias, and strategic timing of insider trades, I find that when information is short-lived, only absolute order imbalance and effective spread are statistically and economically robust predictors of illegal insider trading. However, when information is long-lasting, insiders strategically time their trades to avoid illiquidity, and none of the standard measures considered are reliable predictors, including bid-ask spreads, order imbalance, Kyle’s λ, and Amihud illiquidity. (JEL D53D82G12G14K42) Received: March 14, 2019; Editorial decision: February 18, 2020 by Editor Thierry Foucault. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

The information content of managerial insider trading: evidence from analyst forecasts

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Omar Esqueda ◽  
Thanh Ngo ◽  
Daphne Wang
Keyword(s):  
Insider Trading ◽  
Fixed Effects ◽  
Information Dissemination ◽  
Forecast Accuracy ◽  
Earnings Forecasts ◽  
Ordinary Least Squares ◽  
Content Type ◽  
Forecast Bias ◽  
Forecast Precision ◽  
Insider Trades

PurposeThis paper examines the effect of managerial insider trading on analyst forecast accuracy, dispersion and bias. Specifically, the authors test whether insider-trading information is positively associated with the precision of earnings forecasts. In addition, this relationship between Regulation Fair Disclosure (FD) and the Galleon insider trading case is examined.Design/methodology/approachPooled ordinary least squares (Pooled OLS) rregressions with year-fixed effects, firm-fixed effects, and firm-level clustered standard errors are used. Our proxies for forecast precision are regressed on alternative measures of insider trading activities and a vector of control variables.FindingsInsider-trading information is positively associated with the precision of earnings forecasts. Analysts provide better forecast accuracy, less forecast dispersion and lower forecast bias among firms with insider trading in the six months leading to the forecast issues. In addition, bullish (bearish) insider trades are associated with increased (decreased) forecast bias. Insider trading information complements analysts' independent opinion and increases the precision of their forecast.Practical implicationsRegulators may pursue rules that promote the rapid disclosure of managerial insider trades, particularly given the increasing availability of Internet tools. Securities regulators may attempt to increase transparency and enhance the reporting procedures of corporate insiders, for example, using Internet sources with direct release to the public to ensure more timely information dissemination.Originality/valueThe authors document a positive association between earnings forecast precision and managerial insider trading up to six months prior to the forecast issue. This relationship is stronger after the Securities and Exchange Commission (SEC) prohibited the selective disclosure of material nonpublic information through Regulation FD. In addition, the association between insider trading and forecast accuracy has weakened after the Galleon insider trading case.

DYNAMIC MODELING FORECASTS OF EQUITY PRICE MOVEMENTS IN CASES OF INSIDER TRADING

2012 ◽  
Vol 6 (1) ◽  
pp. 1-30
Author(s):  
William Mallios
Keyword(s):  
Financial Markets ◽  
Case Studies ◽  
Dynamic Modeling ◽  
Insider Trading ◽  
Empirical Studies ◽  
Market Volatility ◽  
Main Line ◽  
Insider Trades ◽  
Price Movements ◽  
Equity Price

Case studies examine the extent to which insider trades in financial markets are a reflection of publicly-based forecasts based on (1) candlestick charts and (2) adaptive drift modeling (ADM) of cointegrated time processes depicted in such charts. ADM accommodates both gradual Darwinian-type market drift and punctuated Gould-Eldridge-type drift associated with market volatility. Covariates in ADM may include mosaic variables, currently a main line of defense for those accused of insider trading. Empirical studies suggest varying degrees of uncertainty in distinguishing between legitimate and illegitimate trading in terms of resulting price movements.

Why are CFO insider trades more informative?

2014 ◽  
Vol 40 (2) ◽  
pp. 157-175 ◽  
Author(s):  
Heather S. Knewtson ◽  
John R. Nofsinger
Keyword(s):  
Information Content ◽  
Insider Trading ◽  
Chief Executive Officers ◽  
Design Methodology ◽  
Chief Executive ◽  
Content Type ◽  
Portfolio Returns ◽  
Insider Trades ◽  
Before And After ◽  
Executive Officers

Purpose – The authors examine whether the stronger information content of chief financial officer (CFO) insider trading relative to that of chief executive officers (CEOs) results from a different willingness to exploit the information asymmetry that exists between executives and outside shareholders (scrutiny hypothesis) or from differing financial acumen between CFOs and CEOs (financial acumen hypothesis). The authors consider the information content of equity purchases for CEOs and CFOs. The paper aims to discuss these issues. Design/methodology/approach – The authors examine purchase-based insider trading portfolio returns before and after the implementation of SOX in firms with high versus low regulation, for routine and opportunistic managers, and in samples of CEOs with prior CFO experience. Findings – The authors provide evidence that SOX affected executives differently and provide support for the scrutiny hypothesis. CFO-based portfolios remain the most profitable post-SOX, but the magnitude of returns has fallen in absolute and relative terms compared to returns for CEOs. Superior financial acumen of CFOs does not appear to be supported. CEO purchase trade returns appear to be lower than CFO returns because CEOs face greater visibility and scrutiny and thus limit their own trading aggressiveness. Originality/value – This research contributes to the literature in explaining why CFOs best CEOs in their insider trading purchases and documents that in the post-SOX period, CFO insider trading superiority disappears.

Germany’s New Insider Law: The Empirical Evidence after the First Year

2006 ◽  
Vol 7 (4) ◽  
pp. 449-462 ◽  
Author(s):  
Olaf Stotz
Keyword(s):  
Transaction Costs ◽  
Empirical Evidence ◽  
Insider Trading ◽  
Abnormal Return ◽  
Abnormal Returns ◽  
First Year ◽  
Insider Trades ◽  
Time Period ◽  
Trading Activities

Abstract This paper investigates insider trading activities in German stocks during the first year following implementation of the new Insider Law on 1 July 2002. It can be observed that insiders act as contrarian investors. They buy stocks after prices have fallen and sell stocks after prices have risen. In general, insider trades are very profitable. A typical stock purchased by an insider yields an abnormal return of almost 3 per cent during the 25 days following the transaction. In contrast, a typical stock that has been sold by insiders achieves an abnormal return of nearly -3 per cent over the same time period. Outsiders who copy the transactions of insiders can achieve nearly the same abnormal returns. Abnormal returns remain substantial even after transaction costs. The results suggest that prices of stocks in which insiders trade do not seem to be semi-strong efficient.

scholarly journals SHORTING THE BEAR: A TEST OF ANECDOTAL EVIDENCE OF INSIDER TRADING IN EARLY STAGES OF THE SUB-PRIME MARKET CRISIS

2012 ◽  
Vol 2 (3) ◽  
pp. 61-69
Author(s):  
Les Coleman ◽  
Adi Schnytzer Adi Schnytzer
Keyword(s):  
Transaction Costs ◽  
Insider Trading ◽  
Anecdotal Evidence ◽  
Options Market ◽  
Market Activity ◽  
Early Stages ◽  
Price Signals ◽  
Insider Trades ◽  
The Us ◽  
Derivative Markets

This article uses trading data in the options market for shares in The Bear Sterns Companies (BSC) during the first half of 2007 during early stages of the US sub-prime crisis as a laboratory to examine the incidence of insider trading. The principle research objective is to enhance our understanding of the extent of strong form inefficiency in equity derivative markets. The presence of illegal insiders is particularly important to predictive markets as they raise transaction costs and deter participation by outsiders, which reduce the accuracy of price signals and markets’ forecasting ability. We take the perspective of a regulator making use of hindsight to identify the most propitious periods for insider trades and to identify market activity that is indicative of insiders. Half the value of BSC options traded during the first half of 2007 were on 19 percent of the days, mostly in contracts in or close-to the money and near to expiry. We find persuasive evidence that insiders could have been active in trading Bear Sterns stock during this period.

scholarly journals The impact of insider trading on analyst coverage and forecasts

2020 ◽  
Vol 33 (3) ◽  
pp. 499-521
Author(s):  
Guanming He ◽  
David Marginson
Keyword(s):  
Insider Trading ◽  
Private Information ◽  
Earnings Forecasts ◽  
Positive Association ◽  
Future Prospects ◽  
Analyst Coverage ◽  
Content Type ◽  
Insider Trades ◽  
The Impact ◽  
Reg Fd

Purpose The purpose of this study is to examine the effect of insider trading on analyst coverage and the properties of analyst earnings forecasts. Given the central role of analysts for information diffusion in stock markets, advancing understanding of the role insider trades may play in analyst coverage and forecasts, especially in the context of a changing legal environment (e.g. the implementation of Regulation Fair Disclosure [Reg FD]), should be a worthy goal. Design/methodology/approach To address the research questions, the authors run regressions in which the authors identify and control for as many possible determinants of analyst coverage and forecasts (e.g. firm size, information asymmetry and earnings performance) that are correlated with insider trades. To alleviate endogeneity concerns, the authors use three approaches. First, the authors extend the sample period to the post-Reg-FD period in which managers are not allowed to provide private information to financial analysts. Second, the authors measure analyst coverage in a window that is lagged by insider trades. Third, the authors employ firm-fixed-effects regressions in all the multivariate tests. Finally, following Larcker and Rusticus (2010), the authors conduct the impact threshold for a confounding variable test to assure that all regression analyses are indeed immune to the potential correlated-omitted-variable bias. Findings The authors find that the level of analyst coverage is positively related to the intensity of insider trades and that analyst coverage is more strongly associated with insider purchases than with insider sales. The authors also find that the positive association between analyst coverage and insider trades is less pronounced after the passage of Reg FD. Further investigations reveal that analysts revise their earnings forecasts upward following insider purchases, the informativeness of analyst forecast revisions significantly increases following insider purchases and optimistic bias in analyst forecast revisions is reduced as a result of insider purchases; the authors do not find similar evidence for insider sales. Research limitations/implications A large body of insider trading literature (Johnson et al., 2009; Badertscher et al., 2011; Thevenot 2012; Skaife et al., 2013; Billings and Cedergren 2015; Dechow et al., 2016) provides evidence that insiders actively trade on their private information, such as their foreknowledge of price-relevant corporate events. This literature suggests that insider trades are potentially value-relevant and are informative about a firm’s future prospects. However, less research attention has been paid to investigating how insider trades might affect market participants’ (especially sophisticated participants’) behavior. This study contributes to understanding the role that insider trading may play in shaping analyst behavior. Practical implications Prior research (Frankel and Li, 2004; Lustgarten and Mande, 1995; Carpenter and Remmers, 2001; Seyhun, 1990) maintains that insider sales are less informative about a firm’s future prospects than are insider purchases because insider sales might take place for the liquidity and diversification purposes. By probing the stock price responses to insider selling activities, Lakonishok and Lee (2001), Jeng et al. (2003) and Fidrmuc et al. (2006) infer that insider selling is not informative about future firm performance. However, for such an inference, the authors cannot rule out the possibility that insider sales do convey value-relevant information, but the stock market does not react correctly to such trading information (Beneish and Vargus, 2002). Because the authors focus on examining analysts’ responses to insider sales, and analysts are supposed to be sophisticated in information processing, this study adds more compelling evidence for the notion that insider sales convey less information about a firm’s future prospects than do insider purchases. Social implications There is an ongoing debate about the benefits and drawbacks of insider trading. Opponents of insider trading view insider trades as inequitable and immoral and assert that restricting insider trades curbs resource misallocation and benefits the whole society. Proponents contend that insider trading accelerates the price discovery process, increases market efficiency (Leland, 1992; Bernhardt et al., 1995; Choi et al., 2016) and may even play a role in rewarding and motivating executives (Roulstone, 2003; Denis and Xu, 2013). The authors add to this debate by documenting that insider trading increases the amount of information valuable to analyst research activities and helps enhance analyst services. Originality/value To the best of the authors’ knowledge, this study is the first to offer firm-level evidence of a positive association between insider trades and analyst coverage. By accounting for the post-Reg-FD regime, this paper is also the first to provide evidence on how analysts, in the absence of access to management’s private information because of the regime change by Reg FD, react to insider trades.

Profits to opportunistic insider trading before and after the Dodd-Frank act of 2010

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Partha Gangopadhyay ◽  
Ken Yook
Keyword(s):  
Insider Trading ◽  
Multivariate Regression ◽  
Trading Behavior ◽  
Content Type ◽  
Share Prices ◽  
Insider Trades ◽  
Trading Profits ◽  
Before And After ◽  
The Usa ◽  
Regression Tests

Purpose The authors examine if opportunistic insider trading profits decrease after the enactment of the Dodd-Frank Act (DFA) in 2010. The DFA expands legal prohibitions on insider trading in the USA. Design/methodology/approach The authors identify opportunistic insider trades following a method that is outlined in Cohen et al. (2012). The authors examine univariate statistics and perform multivariate regression tests to examine opportunistic trading profits before and after the DFA. Similar multivariate regression tests have been used widely in the literature to examine the profitability of insider trades. Findings The authors find that opportunistic insider purchases were highly profitable before the DFA. Profits after opportunistic purchases were significantly lower after the DFA. Opportunistic insider sales were contrarian trades both before and after the DFA. However, share prices kept increasing after insiders sold their shares. Originality/value To the best of the authors’ knowledge, the paper is the first study that compares the profitability of opportunistic insider trades, as identified by Cohen et al., before and after the DFA. The study contributes to the literature that finds that insiders change their strategic trading behavior when the potential costs of the illegal trading increase due to regulatory action.

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