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Article
Publication date: 3 October 2016

Viktoria Dalko and Michael H. Wang

The purpose of this paper is to uncover the essence of insider trading, explain why insider trading law is ineffective and provide implications of the effectiveness of the law.

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Abstract

Purpose

The purpose of this paper is to uncover the essence of insider trading, explain why insider trading law is ineffective and provide implications of the effectiveness of the law.

Design/methodology/approach

This conceptual paper offers three propositions. The first two are based on a literature review of 62 articles in empirical research to develop an understanding of the essence of insider trading and identify the areas in which insider trading is ineffective. This analysis is used in the third proposition to provide a direction in suggesting effective measures to improve insider trading law.

Findings

The essence of insider trading is that corporate insiders exercise informational monopoly power over their trades. This understanding explains why insider trading law is ineffective because it has not taken away the monopoly power that corporate insiders possess and exercise. This understanding also leads to three antitrust suggestions aimed at improving insider trading law.

Practical implications

The findings may provide assistance to the lawmakers and regulators to make insider trading law more effective and enforcement more simplified.

Originality/value

This paper is of value to other researchers attempting to understand the essence of insider trading and to policymakers concerned about the existence of monopolistic behavior in the equity market and income inequality due to corporate insiders’ trading profit.

Details

Studies in Economics and Finance, vol. 33 no. 4
Type: Research Article
ISSN: 1086-7376

Keywords

Article
Publication date: 31 May 2018

Tania Morris and Hamadou Boubacar

This study aims to examine whether insider purchases made within 30 days prior to the publication of various kinds of press releases earn higher abnormal returns (AR) than those…

Abstract

Purpose

This study aims to examine whether insider purchases made within 30 days prior to the publication of various kinds of press releases earn higher abnormal returns (AR) than those in the absence of such announcements. It also attempts to identify the factors that explain ARs.

Design/methodology/approach

This study considers data for Canadian insider purchases made on the Toronto Stock Exchange 60 Index. An event study methodology is used to calculate AR, and a mixed regression model is used to evaluate the effect of corporate news on AR.

Findings

The empirical results indicate that insiders achieve greater ARs when they purchase stock prior to press releases; findings also show that these returns are specifically related to purchases made before the announcements of mergers and acquisitions, ongoing projects, financial structure, financial results and asset disposals. This is because of the firm effect.

Practical implications

These findings have important implications for Canadian market regulatory authorities, especially the Ontario Securities Commission and other market participants who are interested in corporate governance, such as boards of directors and shareholders.

Originality/value

The present findings show that regulatory bodies must work with companies to raise awareness of improper insider trading.

Details

Management Research Review, vol. 41 no. 10
Type: Research Article
ISSN: 2040-8269

Keywords

Article
Publication date: 20 September 2022

Suha Mahmoud Alawi

An effective corporate governance system helps to smoothly run business operations and manage financial matters. To ensure that management behavior is ethical, and their decisions…

Abstract

Purpose

An effective corporate governance system helps to smoothly run business operations and manage financial matters. To ensure that management behavior is ethical, and their decisions are in the best interest of shareholders, corporate governance plays a vital role. This study aims to examine the impact of corporate governance on the insider trading profitability of listed banks in Pakistan, Bangladesh and India.

Design/methodology/approach

The authors take data from the financial statements of 70 listed banks and stock exchanges of the respective countries. The period of the data for our study is from 2010 to 2020. The authors use board independence, the board size, institutional ownership and managerial ownership as measures of corporate governance characteristics. While inside trading profitability is measured with abnormal returns. The authors apply the fixed effect panel regression for hypothesis testing and the two-step dynamic panel system-generalized method of moments (GMM) regression technique for checking the robustness of the findings.

Findings

The authors found that corporate governance has a significant impact on insider trading profitability in Pakistan, Bangladesh and India. Board independence and institutional ownership are negatively related while board size and managerial ownership are positively associated with insider trading profitability.

Originality/value

To the best of our knowledge, this study is the first one to explore the role of corporate governance in limiting insider trading on South Asian banks. It recommends that corporations should follow the code of corporate governance for the protection of shareholders' and other investors' profits.

Details

Journal of Economic and Administrative Sciences, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1026-4116

Keywords

Article
Publication date: 10 January 2018

George Gao, Qingzhong Ma and David Ng

The purpose of this paper is to empirically examine whether corporate insiders extract information from activity of outsiders, specifically the short sellers.

Abstract

Purpose

The purpose of this paper is to empirically examine whether corporate insiders extract information from activity of outsiders, specifically the short sellers.

Design/methodology/approach

Using portfolio approach and Fama-MacBeth regressions, this study examines the relation between short interest and subsequent insider trading activities.

Findings

The following results are reported. First, there is a strong inverse relation between short selling and subsequent insider trading, which is partially due to common private information and same target firm characteristics. Second, insiders extract information from shorts. This information extraction effect is more pronounced for firms whose insiders have stronger incentives to extract shorts information (insider purchases, higher short sale constraints, and better information environments). Third, during the September 2008 shorting ban, the information extraction affect disappeared among the large banned firms, whose shorting activities were distorted.

Research limitations/implications

The findings contradict the of-cited accusations corporate executives hold against short sellers. Instead, corporate insiders appear to trade in the same direction as suggested by shorting activities.

Practical implications

Among the vocal critics of short sellers are corporate insiders, who allege that short sellers beat down their stock prices. Many corporations even engage in stock repurchases to show confidence that the stock will perform well going forward despite the short sellers’ actions. This paper’s analysis on their personal portfolios suggests the other way around.

Originality/value

By focusing on how corporate insider trading is related to shorts information, this paper sheds new light on whether corporate decisions convey the true information the corporate insiders possess.

Details

China Finance Review International, vol. 8 no. 4
Type: Research Article
ISSN: 2044-1398

Keywords

Article
Publication date: 20 January 2023

He Xiao, Jianqun Xi and Hanjie Meng

This study aims to investigate the impact of mandatory audit partner rotation (MAPR) on Chinese listed firms’ insider trading, as well as the moderating effects of firm…

Abstract

Purpose

This study aims to investigate the impact of mandatory audit partner rotation (MAPR) on Chinese listed firms’ insider trading, as well as the moderating effects of firm characteristics on this impact. The economic mechanism behind this impact is also explored.

Design/methodology/approach

This study conducts a regression analysis on firms associated with mandatory and voluntary audit partner rotation based on 2009–2019 firm data and examines whether corporate insiders of these two types of firms increase their share sales within 12 months before their financial statements are submitted to a new rotated auditor.

Findings

Client firms’ corporate insiders increase their share sales within 12 months before their financial statements are submitted to a new mandatory rotated auditor. In addition, such an association is less pronounced for client firms that changed from Big 4 auditors to those with higher financial constraints. This is more pronounced for client firms with higher information asymmetry. The economic mechanism of the finding is that is the MAPR implementation reduces earnings management activities from client firms. Moreover, client firms’ buy-and-hold stock returns decline in the first year after MAPR.

Research limitations/implications

This study should assist investors, corporate shareholders and Chinese policymakers. Investors can be well protected through the adoption of MAPR because upcoming auditors enhance the audit quality of clients by restraining managers’ manipulation of reported earnings and declining firms’ insider trading afterwards. Investors, Chinese policymakers and corporate shareholders should pay more attention to firms’ financial report quality, auditor selection, financial situation, corporate governance and the information environment. Explicitly, firms with less transparent financial report quality, non-big 4 auditors and fewer financial constraints are more likely to be involved in insider trading.

Originality/value

To the best of the authors’ knowledge, none of the extant studies have examined the impact of MAPR on insider sales. This study extends the research on the effect of the audit process on firm market performance by investigating the impact of audit partner rotation policy on insider trading behaviors.

Details

Managerial Auditing Journal, vol. 38 no. 4
Type: Research Article
ISSN: 0268-6902

Keywords

Article
Publication date: 5 September 2018

Han Ching Huang and Pei-Shan Tung

The purpose of this paper is to examine whether the underlying option impacts an insider’s propensity to purchase and sell before corporate announcements, the proportion of…

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Abstract

Purpose

The purpose of this paper is to examine whether the underlying option impacts an insider’s propensity to purchase and sell before corporate announcements, the proportion of insiders’ trading after announcements relative to before announcements, and the insider’s profitability around corporate announcements.

Design/methodology/approach

The authors test whether the timing information and option have impacted on the tendency of insider trade, the percentage of all shares traded by insiders in the post-announcement to pre-announcement periods and the average cumulative abnormal stock returns during the pre-announcement period.

Findings

Insiders’ propensity to trade before announcements is higher for stocks without options listed than for stocks with traded options. This result is stronger for unscheduled announcements than for scheduled ones. The proportion of insiders’ trade volume after announcements relative to before announcements in stocks that have not options listed is higher than those in stocks with traded options. The positive relationship between the insiders’ signed volume and the informational content of corporate announcements is stronger in stocks without traded options than in stocks with options listed. Insider trades prior to unscheduled announcement are more profitable than those before scheduled ones.

Research limitations/implications

The paper examines whether there is a difference between the effects of optioned stock and non-optioned stock. Roll et al. (2010) use the relative trading volume of options to stock ratio (O/S) to proxy for informed options trading activity. Future research could explore the impact of O/S. Moreover, the authors examine how insiders with private information use such information to trade in their own firms. Mehta et al. (2017) argue that insiders also use private information to facilitate trading (shadow trading) in linked firms, such as supply chain partners or competitors. Therefore, future research could consider the impact of shadow trading.

Social implications

Since the insider’s propensity to buy before announcements in stocks without options listed is larger than in stocks with traded options and the relationship is stronger for unscheduled announcements than for scheduled ones, the efforts of regulators should focus on monitoring insider trading in stocks without options listed prior to unscheduled announcements.

Originality/value

First, Lei and Wang (2014) find that the increasing pattern of insider’s propensity to trade before unscheduled announcements is larger than that before scheduled announcements. The authors document the underlying option has impacted the insider’s propensity to purchase and sell, and the relationship is stronger for unscheduled announcements than for scheduled ones. Second, related studies show insider’s trading activity has shifted from periods before corporate announcements to periods after corporate announcements to decrease litigation risk. This paper find the underlying option has influenced the proportion of insiders’ trading after announcements relative to before announcements when the illegal insider trade-related penalties increase.

Details

Managerial Finance, vol. 44 no. 10
Type: Research Article
ISSN: 0307-4358

Keywords

Article
Publication date: 8 June 2012

Qin Lei, Murli Rajan and Xuewu Wang

The purpose of this paper is to conduct an empirical analysis of the trading performance of US corporate insiders.

3000

Abstract

Purpose

The purpose of this paper is to conduct an empirical analysis of the trading performance of US corporate insiders.

Design/methodology/approach

Based on the volume weighted average price (VWAP), the authors propose a metric to measure the trading performance of US corporate insiders: trading alpha. This metric is clean of the contamination effect from insiders' own trades. The authors apply this metric to examine whether insiders can beat the market when they trade.

Findings

It is found that corporate insiders achieve positive trading alpha on both purchases and sales of stocks on average. The existence of a positive trading alpha is robust to controlling for firm, trading and insider characteristics. More importantly, evidence is found for the persistence in corporate insiders' trading performance. Those insiders who traded well in the past continue to trade well over time. Those who well execute in purchases of stocks also perform well in sales.

Originality/value

This paper extends the notion of beating the market from the investment profession to the trading profession. Skyrocketing corporate insider trades provide a natural setting under which to examine the trading performance. The findings that: insiders can beat the market on average when they trade; and there exists persistence in the insiders' trading performance over time and along trading directions are novel and new to the literature. This paper also has bearing on how to evaluate professional traders.

Article
Publication date: 22 February 2008

Jaemin Kim and Nikhil Varaiya

Due to insufficient disclosure on open market share repurchases in the USA, at any given point in time, outside shareholders have no knowledge of whether their firm is executing…

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Abstract

Purpose

Due to insufficient disclosure on open market share repurchases in the USA, at any given point in time, outside shareholders have no knowledge of whether their firm is executing open market share repurchase trades. It is hypothesized that such information disparity between outside shareholders and insiders of a repurchasing firm creates asymmetric opportunities for insiders to time their sell trades in a period when the firm is engaged in buyback trading of its own shares. Insiders have an incentive to sell when the firm is in the market supporting the price by repurchasing its shares. The purpose of this study is to examine this hypothesis (insider timing hypothesis) by investigating insiders' trading activities during the periods of corporate share buyback trading.

Design/methodology/approach

Multiple regression analyses are used to explore relations among trades by insiders, corporate share buyback trades, and a number of other control variables.

Findings

This study finds evidence that insiders do increase the net number of shares sold in a fiscal quarter when the firm is in the market engaged in share buyback trading.

Originality/value

This study suggests the possibility of insiders' opportunistic trading behavior during the periods of corporate open market share buyback trading.

Details

Review of Accounting and Finance, vol. 7 no. 1
Type: Research Article
ISSN: 1475-7702

Keywords

Article
Publication date: 1 December 2001

Phillip Anthony O’Hara

Scrutinises legal, ethical and efficiency standards for and against insider trading. The main arguments supporting insider trading are that it promotes economic efficiency and…

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Abstract

Scrutinises legal, ethical and efficiency standards for and against insider trading. The main arguments supporting insider trading are that it promotes economic efficiency and enterprise. The primary argument against insider trading is that it can be a breach of fiduciary duty; the other arguments of asymmetrical information, in‐principle unequal access to information, and misappropriation seem relatively difficult to accept. On balance, it seems that insider trading may possibly be organised in firms so long as policies are transparent, shareholders accept the practice and certain measures are taken to reduce the incidence of free riders. However, the current state of knowledge on the subject makes it very difficult to come to unequivocal conclusions about whether aspects of it should be illegal or not. Much more theoretical and empirical work is needed on the ethical and social foundations of capitalism, insider trading in general, potential conflict of interest between innovators and shareholders, free riders, possible lack of confidence in the market, and in what ways illegality changes the behaviour of agents.

Details

International Journal of Social Economics, vol. 28 no. 10/11/12
Type: Research Article
ISSN: 0306-8293

Keywords

Book part
Publication date: 13 October 2017

Anne Lafarre

In the previous chapters of this part, we considered voter turnout, ownership concentration and voting behaviour of shareholders. In this chapter, we take a closer look at the…

Abstract

In the previous chapters of this part, we considered voter turnout, ownership concentration and voting behaviour of shareholders. In this chapter, we take a closer look at the types of shareholders that are present in our data set. We define five different types of shareholders and evaluate their stakes. Afterwards, we consider outsider shareholder voting behaviour and find that, when only considering these shareholders, dissent rates are significantly higher. These findings imply that it may be desirable for continental European countries to consider a rule like UK Listing Rules 9.2.2AR to ER.

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