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Outlines previous research on the effects of insider trading on share prices and reactions to the tightening up of US laws against illegal trading. Calculates returns for a sample of large managerial purchases made after the new legislation (1993‐1995) and announced in the Wall Street Journal to test for the presence of asymmetric information, agency conflicts and undervaluation; using firm size, market‐to‐book ratio, Q ratio and price‐earnings ratio as proxies. Finds that share prices react positively to large managerial purchases, especially if the firm is small, undervalued and/or experiencing conflicts between managers and shareholders; and that this effect is not reversed within a year.