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Do what insiders do: Abnormal performances after the release of insiders' relevant transactions

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Author Info

  • Emanuele Bajo
  • Barbara Petracci

Abstract

Purpose – This paper aims to investigate the main motivations for Italian insiders to trade relevant stakes of their companies, specifically assuming that most transactions are driven by speculative intents. According to an information asymmetry hypothesis, insiders, having a superior information set, may better detect the temporary under or overvaluation of stocks. Moreover, when insider trading law is not well enforced, insiders may take advantage of relevant and undisclosed information. In both cases, such transactions would convey an important signal to uninformed traders. Design/methodology/approach – In order to determine whether insiders are able to earn abnormal returns, a standard event study methodology is used and, then, a profitable mimicking portfolio strategy is proposed. Findings – The paper finds statistical evidence of a positive relationship between the change of holdings and the sign of market movement: excess returns are earned after a positive increase of relevant stakes and negative abnormal returns follow an opposite insiders' strategy. In particular, we find significant excess returns between the first and the third month following insiders' transactions. Market response is generally higher for insiders' purchases rather than sales and for insiders owning more than 50 per cent of the company. Research limitations/implications – As at European level laws on insider trading have been updated recently, future research could study this phenomenon after 2002, investigating if new laws were able to guarantee strong efficiency of the Italian market. Originality/value – This paper is interesting because it is one of the few studies on insider trading carried out outside the USA.

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Bibliographic Info

Article provided by Emerald Group Publishing in its journal Studies in Economics and Finance.

Volume (Year): 23 (2006)
Issue (Month): 2 (June)
Pages: 94-118

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Handle: RePEc:eme:sefpps:v:23:y:2006:i:2:p:94-118

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Related research

Keywords: Insider trading; Italy; Stock markets;

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Citations

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Cited by:
  1. Cagdas Tahaoglu & Z. Nuray Guner, 2011. "An Investigation Of Returns To Insider Transactions: Evidence From The Istanbul Stock Exchange," Bogazici Journal of Economics and Administrative Sciences, Bogazici University, Department of Economics, vol. 25(1), pages 57-77.
  2. Kaspar Dardas & Andre Güttler, 2011. "Are directors’ dealings informative? Evidence from European stock markets," Financial Markets and Portfolio Management, Springer, vol. 25(2), pages 111-148, June.
  3. Brajesh Kumar & Ajay Pandey, 2011. "Price Discovery in emerging commodity markets: Spot and Futures relationship in indian commodity Futures market," Bogazici Journal of Economics and Administrative Sciences, Bogazici University, Department of Economics, vol. 25(1), pages 79-121.
  4. Hans Degryse & Frank de Jong & Jérémie Lefebvre, 2009. "An Empirical Analysis of Legal Insider Trading in the Netherlands," CESifo Working Paper Series 2687, CESifo Group Munich.
  5. Betzer, André & Theissen, Erik, 2007. "Insider trading and corporate governance: The case of Germany," CFR Working Papers 07-07, University of Cologne, Centre for Financial Research (CFR).
  6. Siti Sakinah Azizan & Rashid Ameer, 2012. "Shareholder activism in family-controlled firms in Malaysia," Managerial Auditing Journal, Emerald Group Publishing, vol. 27(8), pages 774-794.

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