Insider Trading and Corporate Governance - The Case of Germany

Abstract

We analyze transactions by corporate insiders in Germany. We find that insider trades are associated with significant abnormal returns. Insider trades that occur prior to an earnings announcement have a larger impact on prices. This result provides a rationale for the UK regulation that prohibits insiders from trading prior to earnings announcements. Both the ownership structure and the accounting standards used by the firm affect the magnitude of the price reaction. The position of the insider within the firm has no effect, which is inconsistent with the informational hierarchy hypothesis,.

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

“…I separated the two trading decision to examine if stock investors reacted differently for insider purchases and sales of stock in the capital markets. Consistent with prior research I found that market reactions following insider purchase (sales) are positive (negative), showing that stock markets have at best semistrong market efficiency [5]. I also found that the market reaction following insider sales of stock is lower than that of insider purchases of stocks, showing that investors digest the information from news of insider sales and may consider a variety of reasons from insider trading before following the direction of insider investment decisions.…”

“…In examining multiple trading transactions, our results in Table 7 also reveal that market reactions decline when insider sells stocks frequently. This can be supported by the litigation risk hypothesis that an increase in insider trading activities reduces investors' optimism that the trading may be motivated by non-public information [1,5,12,23]. I also found that market reactions were negatively associated with debt level.…”

“…Most of this field research has focused on the role of federal regulations in insider trading and has ignored the influence of internal or corporate regulations in eliminating opportunistic insider trading [4,5,6]. Internal regulations, such as corporate policies, monitoring and company incentives, may in a way reduce asymmetric information between corporate insiders and outside investors.…”

“…Whether good governance helps to increase stock market efficiency and transparency remains an unanswered question [17]. Corporate insider abnormal performance rejects the strong form market efficiency [5,18,19]. This will be an issue of concern to regulators as…”

Strategic Trading and Trade Reporting by Corporate Insiders

“…The authors show that information is reflected more rapidly in prices when insiders have to disclose their trades. Several empirical papers (e.g., Chang and Suk (1998), Betzer and Theissen (2009)) have shown that share price reactions occur on both the trading and reporting dates. Thus, without the report the market is unable to infer the full information content of the trade, which implies that market prices are distorted in the period between the trading and reporting dates.…”