Insider Trading, News Releases, and Ownership Concentration

Abstract

This paper investigates the market's reaction to U.K. insider transactions and analyzes whether the reaction depends on the firm's ownership. We present three major findings. First, differences in regulation between the U.K. and United States, in particular the speedier reporting of trades in the U.K., may explain the observed larger abnormal returns in the U.K. Second, ownership by directors and outside shareholders has an impact on the abnormal returns. Third, it is important to adjust for news released before directors' trades. In particular, trades preceded by news on mergers and acquisitions and CEO replacements contain significantly less information. Copyright 2006 by The American Finance Association.

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

“…This is consistent with previous studies which argued that investors consider insider trading signalling important to their stock trading decisions [1,12,13,14,23]. Significant abnormal returns following insider purchasing and sales indicate that markets are still, at best, semi-strong in terms of market efficiency.…”

“…The overall consensus from the literature is that regulations, particularly federal regulations, have no or little effect on insider performance in stock investing [1]. Federal regulation is found to impact only the timing of insiders but failed to have an effect on insider performance [2,3].…”

“…On the other side studies showed that corporate insiders have been performing significantly higher than other investors from their stock transactions [1,12,13,14]. Their abnormal performance was discovered to range from few days following their transactions up to six months [1].…”

Strategic Trading and Trade Reporting by Corporate Insiders

“…4 Purchases are reported with longer delays than sales (40.4 days, compared to 32.5 days, respectively). This difference may be indicative of strategic delaying, because previous papers (e.g., Seyhun (1986) and Brochet (2010) for the US, and Fidrmuc et al (2006) for the UK) document that insider purchases are more informative, as evidenced by larger abnormal returns. This finding, in turn, implies that insiders who purchase shares are more likely to possess private information and therefore have greater incentives to conceal their trading activity.…”

“…This hypothesis is supported by a host of papers documenting that insider trades, and purchases in particular, convey information to the market (e.g., Seyhun (1986) and Chang and Suk (1998) for the US; Fidrmuc et al (2006) and Friederich et al (2002) for the UK). The US and many other countries have adopted regulations that require corporate insiders to report their trades.…”