Insider Trading Laws and Stock Price Informativeness

Fernandes, Nuno; Ferreira, Miguel A.

doi:10.1093/rfs/hhn066

Cited by 351 publications

(160 citation statements)

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“…In contrast, the datasets used in related studies with similar goals from Tay et al (2009), Lei and Wu (2005) and all studies on PIN from Easley et al up to 2009Easley et al up to reach only up to 1995Easley et al up to , 2002Easley et al up to 3 and 1998 Whereas the motivation to extend and improve the EKO97 model stems from the large amount of research that relies on it, the second objective of this paper is motivated by the non-existence of empirical evidence on the effectiveness of insider trading regulation on a granular level. Existing studies on the topic usually analyze data on a highly aggregated country level (Bhattacharya and Daouk 2002) or stock level (Fernandes and Ferreira 2009). The other large area of empirical studies deal with legal, disclosed trades by potential insiders (director's dealings).…”

Section: Introductionmentioning

confidence: 99%

A PIN per day shows what news convey: the intraday probability of informed trading

Pöppe

Aitken

Schiereck

et al. 2015

Rev Quant Finan Acc

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This paper develops a new intraday estimation procedure for the sequential microstructure trading model initially proposed by Easley et al. (Rev Financ Stud 10:805-835, 1997a). Using a full year of intraday trading data for the top 100 German stocks, we demonstrate how the new estimation procedure eliminates or significantly reduces the shortcomings of the original approach in recent, high-frequency trading environments. We slice a trading day in buckets of several minutes' length to obtain one estimate of the composite variable probability of informed trading (PIN) per day. This approach makes PIN applicable in short horizon event studies. Convergence rates are above 95 % even for the most liquid stocks and the model's underlying assumptions of independence for the arrival of traders and information events are fulfilled to a much higher degree than in the original approach. An empirical application in an event study type setting demonstrates how official announcements stipulated in German insider trading legislation significantly reduce information asymmetry upon public disclosure.

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Section: Introductionmentioning

confidence: 99%

A PIN per day shows what news convey: the intraday probability of informed trading

Pöppe

Aitken

Schiereck

et al. 2015

Rev Quant Finan Acc

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“…On the other hand, IT can contribute to the timely incorporation of new information into stock prices. Fernandes and Ferreira [] find that, in their global sample of firms, tightening IT laws improves the information environment via both more informative stock prices and increased public information collection.…”

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confidence: 99%

Dividend Payouts and Information Shocks

Hail

Tahoun

Wang

2014

J of Accounting Research

148

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This paper examines changes in firms' dividend payouts following an exogenous shock to the information environment. Traditional signaling, agency, and voluntary disclosure models predict that the more is commonly known about a firm and its competitors in the marketplace, the less private information managers will have to reveal themselves via costly signals or cash disbursements. To test these predictions, we analyze the dividend payment behavior for a global sample of firms around the mandatory adoption of IFRS and around the initial enforcement of new insider trading laws. Both events have the potential to improve the general information environment in the economy. We find that following the two events firms are less likely to pay (or increase) cash dividends, but more likely to cut (or stop) such payments. The changes in dividend policy occur around the time of the informational shock and only in countries and for firms subject to the regulatory change. In further analyses we find that the information content of dividends, measured as threeday absolute announcement returns, is lower after the informational events. The findings underscore that firms' payout policies, among other things, depend on the extent of information about all firms in the economy. AbstractThis paper examines changes in firms' dividend payouts following an exogenous shock to the information environment. Traditional signaling, agency, and voluntary disclosure models predict that the more is commonly known about a firm and its competitors in the marketplace, the less private information managers will have to reveal themselves via costly signals or cash disbursements. To test these predictions, we analyze the dividend payment behavior for a global sample of firms around the mandatory adoption of IFRS and around the initial enforcement of new insider trading laws. Both events have the potential to improve the general information environment in the economy. We find that following the two events firms are less likely to pay (or increase) cash dividends, but more likely to cut (or stop) such payments. The changes in dividend policy occur around the time of the informational shock and only in countries and for firms subject to the regulatory change. In further analyses we find that the information content of dividends, measured as three-day absolute announcement returns, is lower after the informational events. The findings underscore that firms' payout policies, among other things, depend on the extent of information about all firms in the economy. JEL classification:G14, G15, G35, K22, M41 with the signal fall below the additional valuation premium from escaping the pooling equilibrium. If the firms' information environment improves, for instance, because firms are required to adopt a more transparent set of accounting standards or existing reporting and disclosure rules are more tightly enforced, outside investors should be better able to assess each individual firm's type a priori. As a result, the expected valuation premium for the ...

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“…In their model, returns generated by hedging trades tend to reverse, whereas returns generated by speculative trades tend to continue. Similar to Fernandes and Ferreira (), we calculate Llorente et al's private information measure by estimating the following time‐series regression:

r_{i, t}^{} = α_{i, j} + β_{i} r_{i, t - 1}^{} + θ_{i} r_{i, t - 1}^{} V_{i, t - 1}^{} + e_{i, t},

where

r_{i, t}^{}

is firm i 's weekly returns and

V_{i, t}^{}

is the log of turnover volume, detrended by subtracting a 26‐week moving average. The amount of information‐based trading is given by the regression coefficient

θ_{i}

(

t h e t a_{i}

) on the interaction variable.…”

Section: Private Information In Stock Pricesmentioning

confidence: 99%

“…Llorente et al's (2002) measure is commonly employed in corporate finance studies, such as Fernandes and Ferreira (, ) and Fresard (). Fernandes and Ferreira () find that whereas cross‐listing increases stock price informativeness in developed countries, it decreases stock price informativeness in emerging markets.…”

mentioning

confidence: 99%

“…Fernandes and Ferreira () find that whereas cross‐listing increases stock price informativeness in developed countries, it decreases stock price informativeness in emerging markets. Fernandes and Ferreira () find that enforcement of insider trading laws increases stock price informativeness in developed countries but does not affect stock price informativeness in emerging markets. Fresard () finds that stock price informativeness affects managers’ saving decisions.…”

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confidence: 99%

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Managerial Learning Through Customer–supplier Links

Fuller

Yildiz

2018

J of Financial Research

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We provide empirical evidence that supplier firms’ managers learn new information from their customers’ stock prices when they make investment, long‐term financing, short‐term financing, and dividend decisions. Our findings provide novel empirical evidence that the stock market has real effects on the economy through customer–supplier links. Our results indicate that managerial learning is not confined to peers’ or firms’ own stock prices but is a more comprehensive process that includes cross‐industry learning. Furthermore, managerial learning is not limited to investment decisions but is also present in long‐term financing, short‐term financing, and dividend decisions.

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Insider Trading Laws and Stock Price Informativeness

Cited by 351 publications

References 39 publications

A PIN per day shows what news convey: the intraday probability of informed trading

A PIN per day shows what news convey: the intraday probability of informed trading

Dividend Payouts and Information Shocks

Managerial Learning Through Customer–supplier Links

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