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The Information Content of Directors’ Trades: Empirical Analysis of the Australian Market

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  • Lisa Hotson
  • Navjot Kaur
  • Harminder Singh

    ()
    (Deakin University)

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    Abstract

    We examine the trading activities of directors in shares of their own companies on the Australian Stock Exchange during the July-December 2005 period. We find that directors of small companies in particular earn abnormal return after both their ‘Purchase’ and as well as their ‘Sale’ trade. Directors of these companies have an uncanny ability to time the market by trading when mispricing is greatest, and are able to predict the future performance of their firms in short run. For directors of medium and large companies, we find evidence that ‘Sale’ trades are the ones which work as loss avoiders. Outsiders recognise to some extent that directors’ trades are informative, however they are slow to incorporate the new information into prices, refuting much of the market efficiency literature.

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    File URL: http://www.deakin.edu.au/buslaw/aef/workingpapers/papers/2007_19aef.pdf
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    Bibliographic Info

    Paper provided by Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance in its series Accounting, Finance, Financial Planning and Insurance Series with number 2007_19.

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    Length: 31 pages
    Date of creation: 19 Dec 2007
    Date of revision:
    Handle: RePEc:dkn:acctwp:aef_2007_19

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    Phone: 61 3 9244 3815
    Web page: http://www.deakin.edu.au/buslaw/aef/index.php

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    1. Eugene F Fama, . "Market Efficiency, Long-Term Returns, and Behavioral Finance," CRSP working papers 448, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
    2. Seyhun, H. Nejat, 1986. "Insiders' profits, costs of trading, and market efficiency," Journal of Financial Economics, Elsevier, vol. 16(2), pages 189-212, June.
    3. Lakonishok, Josef & Lee, Inmoo, 2001. "Are Insider Trades Informative?," Review of Financial Studies, Society for Financial Studies, vol. 14(1), pages 79-111.
    4. Dimson, Elroy & Marsh, Paul, 1986. "Event study methodologies and the size effect : The case of UK press recommendations," Journal of Financial Economics, Elsevier, vol. 17(1), pages 113-142, September.
    5. Leslie A. Jeng & Andrew Metrick & Richard Zeckhauser, . "Estimating the Returns to Insider Trading," Rodney L. White Center for Financial Research Working Papers 19-99, Wharton School Rodney L. White Center for Financial Research.
    6. Jarrell, Gregg A & Poulsen, Annette B, 1989. "Stock Trading before the Announcement of Tender Offers: Insider Trading or Market Anticipation?," Journal of Law, Economics and Organization, Oxford University Press, vol. 5(2), pages 225-48, Fall.
    7. John Matatko & Alan Gregory & Ian Tonks & Richard Purkis, 1993. "UK Directors Trading: The Impact of Dealings in Smaller Firms," FMG Discussion Papers dp160, Financial Markets Group.
    8. John D. Lyon & Brad M. Barber & Chih-Ling Tsai, 1999. "Improved Methods for Tests of Long-Run Abnormal Stock Returns," Journal of Finance, American Finance Association, vol. 54(1), pages 165-201, 02.
    9. Seyhun, H Nejat, 1992. "Why Does Aggregate Insider Trading Predict Future Stock Returns?," The Quarterly Journal of Economics, MIT Press, vol. 107(4), pages 1303-31, November.
    10. Cornell, Bradford & Sirri, Erik R, 1992. " The Reaction of Investors and Stock Prices to Insider Trading," Journal of Finance, American Finance Association, vol. 47(3), pages 1031-59, July.
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    12. Allan Hodgson & Bart van Praag, 2006. "Information trading by corporate insiders based on accounting accruals: forecasting economic performance," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 46(5), pages 819-842.
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    14. Daniel, Kent & Hirshleifer, David & Teoh, Siew Hong, 2002. "Investor psychology in capital markets: evidence and policy implications," Journal of Monetary Economics, Elsevier, vol. 49(1), pages 139-209, January.
    15. John, Kose & Lang, Larry H P, 1991. " Insider Trading around Dividend Announcements: Theory and Evidence," Journal of Finance, American Finance Association, vol. 46(4), pages 1361-89, September.
    16. Givoly, Dan & Palmon, Dan, 1985. "Insider Trading and the Exploitation of Inside Information: Some Empirical Evidence," The Journal of Business, University of Chicago Press, vol. 58(1), pages 69-87, January.
    17. Finnerty, Joseph E, 1976. "Insiders and Market Efficiency," Journal of Finance, American Finance Association, vol. 31(4), pages 1141-48, September.
    18. Volume 23 Number 1, 1994. "Insider Trading Following Material News Events: Evidence from Earnings," Financial Management, Financial Management Association, vol. 23(1), Spring.
    19. Jensen, Michael C., 1978. "Some anomalous evidence regarding market efficiency," Journal of Financial Economics, Elsevier, vol. 6(2-3), pages 95-101.
    20. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
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    Cited by:
    1. Katherine Uylangco & Steve Easton & Robert Faff, 2010. "The equity and efficiency of the Australian share market with respect to director trading," Accounting Research Journal, Emerald Group Publishing, vol. 23(1), pages 5-19, July.

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