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Evidence of the contribution of legal insider trading to market efficiency

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Author Info

  • AKTAS, Nihat

    (Université catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE))

  • DE BODT, Eric

    (Université catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE))

  • VAN OPPENS, Hervé
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    Abstract

    Does legal insider trading contribute to market efficiency? Using the refinement proposed by the recent microstructure literature, we analyze the information content of legal insider trading. Our sample encompasses 2,110 different companies subject to 59,244 aggregated daily insider trades over the period from January 1995 to the end of September 1999. Our main findings are the followings. (i) Consistent with previous literature, financial markets offer a mild response in terms of abnormal returns to insider trading activities. (ii) The univariate analysis of stock prices on insider net purchase and net sale days suggests insiders' market timing ability. (iii) Market liquidity seems to be weaker on insider net purchase days, indicating that net buyer insiders are on average market liquidity consumers. (iv) Market liquidity seems to be higher on insider net sale days, indicating that net seller insiders are on average market liquidity providers. (v) The analysis of the considered information proxy reveals that insiders enhance market efficiency. Insider trading clearly permits faster price discovery on insider trading days.

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    File URL: http://www.uclouvain.be/cps/ucl/doc/core/documents/coredp2007_14.pdf
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    Bibliographic Info

    Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2007014.

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    Date of creation: 01 Feb 2007
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    Handle: RePEc:cor:louvco:2007014

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    Related research

    Keywords: legal insider trading; market efficiency; order imbalance;

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    Cited by:
    1. Peter-Jan Engelen & Luc Liedekerke, 2007. "The Ethics of Insider Trading Revisited," Journal of Business Ethics, Springer, vol. 74(4), pages 497-507, September.

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