Detecting Information from Directors' Trades: Signal Definition and Variable Size Effects

Abstract

There have been three empirical studies examining the share price reaction following trades by directors of UK companies (King and Poell, 1988; Pope, Morris and Peel, 1990; and Gregory, Matatko, Tonks and Pukiss, 1994). All three of these UK studies used different definitions of 'buy' and 'sell' signals resulting from the transactions of directors and employ different controls to detect the presence of any 'size effects'. We investigate whether the signal definition explains the different conclusions drawn by these earlier studies, and examine whether or not any observed abnormal returns are explicable by the small companies effect. We also investigate trading strategies based on holding a long portfolio of shares purchased or a short portfolio of shares sold by directors held until the end of the study period or until a 'reserving event' (e.g. a sale following a purchase by director[s] is observed). Copyright Blackwell Publishers Ltd 1997.

Market Reaction to Dividend Announcement: Evidence from Turkish Stock Market

“…The event study utilizes traditional methodology (Armitage, 1995) commonly used to test for the announcement effects of dividends (Pettit, 1972;Masulis, 1980;Brown & Warner, 1980;Aharony & Swary, 1980;Woolridge, 1982;Asquith & Mullins, 1983;Venkatesh, 1989;Akhigbe & Madura, 1996), the announcement effects of earnings (Dennis & McConnel, 1986), and the existence of insider trading (Sivakumar & Waymire, 1994, Gregory et al, 1997Hillier & Marshall, 2002).…”

Insider Trading, News Releases, and Ownership Concentration

“…Seyhun (1986), Lin and Howe (1990), and Chang and Suk (1998) report positive abnormal returns on insider purchases for the US. Similarly, several UK studies, such as Gregory, Matatko and Tonks (1997), find positive abnormal returns for the UK over horizons of 6 to 12 months following directors' purchases.…”

“…26 An alternative method would be the Dimson and Marsh (1986) method that uses betas obtained from size portfolios. However, Gregory et al (1997) report that the difference between the Dimson-Marsh benchmark and the Lakonishok et al (1994) benchmark is relatively small for UK data. 27 If the true abnormal return is larger for securities with higher variance, then the test statistic should give equal weight to the realized cumulative abnormal returns of each security, which is what J1 does.…”

“…The existence of significant abnormal returns over this period is interpreted as proof of superior information held by insiders (see, e.g., Jaffe (1974), Rozeff and Zaman (1988), Lin and Howe (1990), Gregory et al (1997), and Lakonishok and Lee (2001)). The second strand of the literature assumes that stock markets are (to some degree at least) informationally efficient and that share prices adjust rapidly to insider trades.…”

Do Board Characteristics Matter to Insider Timing and Profitability in the US Market?

“…However, [2] simple market model prediction error adjustment was used to adjust the abnormal returns and to control for possible thin trading. The time-varying size effect of [45], [46] and [2] in prediction errors was used to adjust the abnormal returns.…”