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

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Author Info
Lisa Hotson
Navjot Kaur
Harminder Singh () (Deakin University)
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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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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  2. John Elliott & Dale Morse & Gordon Richardson, 1984. "The Association between Insider Trading and Information Announcements," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 521-536, Winter. [Downloadable!] (restricted)
  3. Lin, Ji-Chai & Howe, John S, 1990. " Insider Trading in the OTC Market," Journal of Finance, American Finance Association, vol. 45(4), pages 1273-84, September. [Downloadable!] (restricted)
  4. Gregory, Alan, et al, 1994. "UK Directors' Trading: The Impact of Dealings in Smaller Firms," Economic Journal, Royal Economic Society, vol. 104(422), pages 37-53, January. [Downloadable!] (restricted)
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  5. 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. [Downloadable!] (restricted)
  6. Givoly, Dan & Palmon, Dan, 1985. "Insider Trading and the Exploitation of Inside Information: Some Empirical Evidence," Journal of Business, University of Chicago Press, vol. 58(1), pages 69-87, January. [Downloadable!] (restricted)
  7. Lakonishok, Josef & Lee, Inmoo, 2001. "Are Insider Trades Informative?," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 14(1), pages 79-111.
  8. 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. [Downloadable!] (restricted)
  9. 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. [Downloadable!] (restricted)
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  14. 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. [Downloadable!] (restricted)
  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. [Downloadable!] (restricted)
  16. Finnerty, Joseph E, 1976. "Insiders and Market Efficiency," Journal of Finance, American Finance Association, vol. 31(4), pages 1141-48, September. [Downloadable!] (restricted)
  17. Volume 23 Number 1, 1994. "Insider Trading Following Material News Events: Evidence from Earnings," Financial Management, Financial Management Association, vol. 23(1), Spring.
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  19. Keown, Arthur J & Pinkerton, John M, 1981. "Merger Announcements and Insider Trading Activity: An Empirical Investigation," Journal of Finance, American Finance Association, vol. 36(4), pages 855-69, September. [Downloadable!] (restricted)
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