Short‐run Returns around the Trades of Corporate Insiders on the London Stock Exchange

Abstract

Previous work examined the long-run profitability of strategies mimicking the trades company directors in the shares of their own company, as a way of testing for market efficiency. The current paper examines patterns in abnormal returns in the days around these trades on the London Stock Exchange.We find movements in returns that are consistent with directors engaging in shortterm market timing. We also report that some types of trades have superior predictive content over future returns. In particular, medium-sized trades are more informative for short-term returns than large ones, consistent with Barclay and Warner's (1993)`stealth trading' hypothesis whereby informed traders avoid trading in blocks.Another contribution of this study is to properly adjust the abnormal return estimates for microstructure (spread) transactions costs using daily bid-ask spread data. On a net basis, we find that abnormal returns all but disappear.

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 standard market model was used by previous studies to determine insider profit in the capital markets [1,12,13,14]. The simple market model has been argued by earlier studies to yield better and more accurate abnormal returns than the Capital Asset Pricing Model (see Equation 1) [12,43,44].…”

“…Insider trading may cause an increase in the volume of trades, causing an increase in return volatility during the given period. When this happens, the assumption of identical distributed excess returns is violated [48].…”

“…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

“…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.…”