No relationship is detected between abnormal return and volume. A novel method to calculate the abnormal price is proposed. The effect of trading of all types of insiders on stock characteristics is analyzed. The relationship between abnormal return and abnormal volume, after an insider trade, is investigated. Nanda, S. Published by Emerald Publishing Limited.
Anyone may reproduce, distribute, translate and create derivative works of this article for both commercial and non-commercial purposes , subject to full attribution to the original publication and authors. The legality of an insider trade depends on the information it is based. It is legal if it is based on public information. The uncertainty about insiders' information has spawned academic literature on whether to prohibit insider trading Prentice and Donelson, One strand of studies has argued against insider trading Schotland, ; Cho and Shaub, ; Werhane, However, most investors believe that insiders' transactions are based on non-public information, and mimicking these transactions can help them earn a better return Tavakoli et al.
Largescale mimicking of these transactions should result in a deviation of the actual values of stock characteristics price, return and volume from their expected values. If such a deviation is detected, then it can be inferred that investors are mimicking insiders and that they believe insiders' transactions are based on non-public information. To investigate the effect of insider trade on price, studies like Tavakoli et al.
However, there is no study that uses daily closing stock price and event study method to analyze the effect of insider trading on price. It is essential to study the impact of insider trading on the daily stock price as daily stock price data is devoid of intraday data issues like intraday volatility movements for example, the volatility is high at the opening and closing of the trading day and microstructure noise.
Therefore, the daily closing stock price data are used to study the effect of insider trade on the stock price. Some studies connect market efficiency with abnormal values of stock characteristics Aktas et al.
According to such studies, the abnormal value of stock characteristics proves that the market is not efficient. The event study method is undertaken to calculate the abnormal value of stock price, return and volume.
The mean model is used to calculate abnormal price, and the market model is used to calculate abnormal return. The method proposed by Ajinkya and Jain is used to calculate the abnormal volume. The paper also studies the effect on stock characteristics after insider purchases and insider sales. The data for the study include most liquid Indian firms listed on the Bombay Stock Exchange.
Tavakoli et al. Following such studies, the paper examines the effect of transactions of different types of insiders on the stock characteristics. The study also analyses the relationship between abnormal return and abnormal volume.
The findings indicate that insider trades significantly affect the stock characteristics price, return and volume. This finding is true for both buy and sell transactions. The results also indicate that insider trades of directors and executives, promoters [1] and majority shareholders affect the stock price and volume. However, the transactions of most of these insiders are found to have no effect on return.
The results also indicate that there is no relationship between abnormal return and abnormal volume. This study contributes to the current literature in the following ways. The study suggests a method to calculate the abnormal price.
This helps to understand how price reacts after an insider trade and also contributes toward the market efficiency literature. The study investigates the relationship between abnormal return and abnormal volume, after an insider trade. The study is also the first to investigate the effect of insider trades of different category of insiders on price, return and volume.
This will help to detect trade of which category of insiders is mostly mimicked by outside investors and whose trade is generating higher abnormal return and price. This insight can be used by investors. The study also investigates the effect of buy and sell transactions of different category of insiders. This will further help in investment decisions as sell transactions are known to be based on liquidity concerns. The paper is organized as follows. The next section presents an overview of the literature.
Section 3 discusses the method, and Section 4 the data and results. The conclusion is provided in Section 5. This study investigates the effect of insider trading on the stock markets by assessing its impact on stock characteristics like price, return and volume. The findings from extant literature corresponding to each stock characteristic are reviewed below.
Most of the studies use the abnormal return to study the effect of insider trading on price Chakravarty and McConnell, ; Inci et al. There has been scant focus on the price effect of insider trading. Very few studies use daily price data to examine the effect of legal insider trading on stock price.
Leland suggests that when insider trading is permitted, stock price is higher on an average. Aktas et al. Many studies suggest that return is affected by insider trades Pettit and Venkatesh, ; Chang and Suk, ; Gurgul and Majdosz, ; Degryse et al. Most studies indicate that insider trades result in higher abnormal return for the insiders Jeng et al.
Studies like Jeng et al. However, studies like Cheuk et al. As insider trades lead to positive abnormal return and have predictive powers, it is expected that these trades act as a signal to uninformed investors.
Wisniewski and Bohl , Gurgul and Majdosz , Firth et al. Thus, most studies assert that insider trades result in abnormal return for insiders and can be mimicked by outsiders to earn abnormal return. Various studies have reported that insider trading results in an increase in the volume of the market Buffa, ; Chang and Suk, ; Bruce et al. As a result, they try to mimic the insiders' trades.
Numerous studies have confirmed the hypothesis and have suggested that outsiders attempt to mimic insider trades, thereby increasing trading volume Firth et al. However, Aktas et al. Gurgul and Majdosz suggest that only insider purchases affect the volume, and this effect can be seen three days prior to the announcement. Most of the literature mentioned above are not studied in India or countries with similar institutional setting.
The institutional setting in India differs a lot from the US or any other developed nation. The significant differences are — concentrated ownership, lax implementation of regulations and slow information dissemination. The distinct institutional setting in India does present an opportunity to investigate if insiders benefit abnormally from their trades. Studies suggest that insider trading affects either price, return or volume, but no study examines the effect of insider trading on all the three stock characteristics.
Keeping in view the above mentioned research gap, the following hypothesis is proposed: H1. Insider trading affects stock characteristics — price, return and volume. Most of the studies analyze the impact of trading of only one type of insider on one of the stock characteristics Degryse et al.
For example, Pettit and Venkatesh and Degryse et al. None of the studies analyze the impact of trades of all types of insiders on all the stock characteristics. The following hypothesis is proposed to address the research gap: H2. Insider trades of different types of insiders affect the stock characteristics. A number of studies Hiemstra and Jones, ; Chen et al. Bajo has studied, in a minimal way, the relationship between abnormal volume and abnormal return by finding out the amount of abnormal return in three different abnormal volume cut-offs.
To address this research gap, the following hypothesis is proposed: H3. Abnormal return affects abnormal volume and vice-versa. The short-run event study method Brown and Warner, and its variants are adopted for addressing the hypotheses. The method used for each stock characteristic is explained below. The event study method requires the determination of two periods — an estimation window [ t 1 , t 2 ] and an event window [ T 1 , T 2 ].
In most of the studies related to investigating the effects of insider trading on return for example, Wisniewski and Bohl, ; Cheuk et al. Advocates of insider trading believe that it avoids risks and makes markets more efficient. Regardless of the stance individuals take, insider trading is currently illegal and can be severely punished through fines and time in prison.
Business Leaders. Actively scan device characteristics for identification. Use precise geolocation data. Select personalised content. Create a personalised content profile.
Measure ad performance. Select basic ads. Create a personalised ads profile. Select personalised ads. Apply market research to generate audience insights. Measure content performance. Develop and improve products. List of Partners vendors.
Your Money. Personal Finance. Your Practice. Popular Courses. Key Takeaways Insider trading refers to the purchase or sale of securities by someone with information that is material and not in the public realm. Critics of insider trading laws claim it should be legal because it provides useful information to markets and the laws against it can harm innocent people, while the offense itself causes little damage to others.
The main argument against insider trading is that it is unfair and discourages ordinary people from participating in markets, making it more difficult for companies to raise capital. Insider trading based on material nonpublic information is illegal.
When this illegal behavior multiplies, some companies and individuals start feeling empowered to keep on coordinating insider trades because they come to believe their chances of being caught are very low.
To obtain help with handling all of your Georgia business planning needs, please contact Shane Smith Law today. You can schedule your free initial consultation with a knowledgeable Peachtree City estate planning attorney by calling: Search Our Site.
However, the Securities Acts did not contain a broad prohibition of insider trading as such. Broader enforcement of restrictions on insider trading began only in the s, when the U.
In those and subsequent cases that shaped the evolution of the general insider trading prohibition, the SEC based its justification for regulation on the unfairness of unequal access to information, the violation of fiduciary duties by insiders, and the misappropriation of information as a form of property.
The U. Nevertheless, federal legislators have never defined insider trading; in the s, the SEC actually opposed efforts to do so. Since the U. Supreme Court decided United States v. As of , at least ninety-three countries, the vast majority of nations that possess organized securities markets, had laws regulating insider trading.
Several factors explain the rapid emergence of such regulation, particularly during the last twenty years: namely, the growth of the securities industry worldwide, pressures to make national securities markets look more attractive in the eyes of outside investors, and the pressure the SEC exerted on foreign lawmakers and regulators to increase the effectiveness of domestic enforcement by identifying and punishing offenders and their associates operating outside the United States.
At the same time, the effectiveness of the insider trading prohibition and the commitment to enforcing it have been low in most countries Bhattacharya and Daouk Who benefits from regulation of insider trading? One group of beneficiaries is market professionals—broker-dealers, securities analysts, floor traders, arbitrageurs, and institutional investors. Regulation also, of course, benefits the regulators—that is, the SEC—by giving that agency greater power, prestige, and budget Bainbridge However, the benefits from insider trading laws to small shareholders, the alleged primary beneficiaries, have been extensively debated.
Henry G. Manne popularized the economic analysis of insider trading Manne , although a similar book-length attempt by Frank P. Smith is dated a quarter century earlier Smith The major public policy questions economists and legal scholars have tried to answer are: How extensive should restrictions on insider trading be and should they be mandatory through the means of public regulation or voluntary by individual companies and securities exchanges? Many researchers argue that trading on inside information is a zero-sum game, benefiting insiders at the expense of outsiders.
But most outsiders who bought from or sold to insiders would have traded anyway, and possibly at a worse price Manne So, for example, if the insider sells stock because he expects the price to fall, the very act of selling may bring the price down to the buyer.
In such a case, the buyer who would have bought anyway actually gains. But this does not mean that no one loses because of insider trading, although such losses are likely to be diffuse and not easily traceable Wang and Steinberg The outsiders who lose in such a situation are buyers on the margin, who would not have bought unless the insider had sold and brought the price down slightly, and sellers who sold for less or could not sell at all.
Consequently, some commentators argue that such systematic diversion of wealth from outsiders to insiders may decrease the share price and raise the corporate cost of capital Mendelson However, long-term shareholders, as opposed to those speculating on short-term price movements, are rarely adversely affected by insider trading because the probability is low that such trading would affect the timing of their transactions and the corresponding market price Manne A controversial case is that of abstaining from trading on the basis of inside information Fried For example, an insider who had planned to sell stock but abstains on the basis of positive inside information thereby marginally prevents a potential buyer from getting a better deal on the stock.
Yet, it is clearly infeasible to monitor and prosecute insiders for not trading.
0コメント