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Information asymmetry and insider trade profitability in India

Mohammed Iqbal (Department of Commerce, Pondicherry University, Pondicherry, India)
Shijin Santhakumar (Department of Commerce, Pondicherry University, Pondicherry, India)

Journal of Indian Business Research

ISSN: 1755-4195

Article publication date: 4 January 2018

Issue publication date: 7 February 2018

679

Abstract

Purpose

This study aims to measure the magnitude of information asymmetry between insiders and outsiders in Indian equity market. The study also investigates the effect of major information sources that affect information asymmetry namely, the informativeness of financial statements, news reports about the company and analyst follow-up.

Design/methodology/approach

Six-month profitability of insider trade was used as the proxy to measure information asymmetry. Fama-MacBeth two-stage regression was used to analyse the effect of information sources upon information asymmetry.

Findings

The results of the analysis demonstrate that in comparison with findings of similar studies the level of information asymmetry is comparatively high in India. On an average, profitable insider traders in India earn 19.28 per cent return than outside investors. Purchase transactions are more profitable than sales transactions, while the size of company and information asymmetry is associated inversely. Further, news and analyst follow-up are inversely associated with information asymmetry whereas informativeness of financial statements has little effect on information asymmetry.

Practical implications

The study have important insights for corporates in insider information management and legal compliance of insiders’ market activities. Results pointing to the requirements of a deeper Regulatory monitoring and stringent legal framework.

Social implications

The result validates the concerns of investor protection against informed trade.

Originality/value

The measurement of information asymmetry using profitability of insider trade is novel in Indian context even though the methodology is often used in the literature.

Keywords

Citation

Iqbal, M. and Santhakumar, S. (2018), "Information asymmetry and insider trade profitability in India", Journal of Indian Business Research, Vol. 10 No. 1, pp. 53-69. https://doi.org/10.1108/JIBR-05-2017-0059

Publisher

:

Emerald Publishing Limited

Copyright © 2018, Emerald Publishing Limited

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