Insider Trading Essay example -- Business, Investment

Insider trading relates the investment behavior of corporate insiders with their own stock. Insider trading topic not only attracts finance literature (see, e.g., Lorie and Niederhoffer 1968, Jaffe 1974, Seyhun 1986, 1998, Rozeff and Zaman 1988, Lin and Howe 1990, and Lakonishok and Lee 2001), but also attracts law and economics literature (see, e.g., Manna 1966, Georgeakopoulos 1993, and Carlton and Fischel 1983). The finance literature on insider trading had started with an examination of the strong market efficiency hypothesis. Subsequently, researchers gave their attention towards the determinations of insider trades’ profitability. Furthermore, another set of researcher also gave an attempt to find the information contents of insider trading to outsiders, which is an application to test the semi-strong market efficiency hypothesis. The third group of researchers measured insider trading activities around the corporate announcements, for example, merger and acquisitions, dividend announcements. In the following section, we will summarize studies that focus on the information content (abnormal return) of insider trading. Finnerty (1974) measured the strong market efficiency hypothesis condition on insider trading. The period of his study was from January 1969 to December 1972. He considered only open market trade for NYSE firms. To measure the strong market efficiency hypothesis, he formed two portfolios- buy and sale for each month; the buy (sale) portfolio for month t comprised of those firms for which any insiders were buyer (seller). Thereafter, he calculated portfolio returns for the portfolio formation month and subsequent eleven months. Using the CAPM to calculate abnormal return to insider trades, Finnerty (1974) ... ...ir timely disclosure of insider trades from 10 days after the month in which the trade had occurred regime to 2 days regime on August 29, 2002. He stated that if the information content of insider trades is relevant to outsiders, the timeliness announcement of insider trades will improve the information content of insider trades. And he found that the abnormal return (CAAR=1%) of pre-amendment associated with announcement of insider buys was lower than the abnormal return (CAAR=2.3%) of post-amendment. However, he did not find similar results for insider sales, hence; he again reinvestigated insider sales after taking litigation risk into consideration. And he concluded that insiders of firms those are associated with more litigation risk more likely to refrain from sales on private information than insiders of firms those are associated with low litigation risk.