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Does Insider Trading Really Move Stock Prices?

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  • Chakravarty, Sugato
  • McConnell, John J.

Abstract

Prior studies have reported a positive correlation between insider trading and stock price changes. The implication of these studies is that insider (i.e., informed) trades have a differential impact on price discovery than non-insider (i.e., uninformed) trades. Based on these results, various scholars have argued for the legalization of insider trading to facilitate rapid price discovery. We analyze the trading activity of a confessed inside trader, Ivan Boesky, in Carnation s stock just prior to the acquisition of Carnation by Nestle, and find that our tests are unable to distinguish the price effect of Boesky s (i.e., informed) purchases of Carnation s stock from the effect of non-insider (i.e., uninformed) purchases. Our conclusion survives extensive robustness tests and has methodological and public policy implications.

Suggested Citation

  • Chakravarty, Sugato & McConnell, John J., 1998. "Does Insider Trading Really Move Stock Prices?," Purdue University Economics Working Papers 1114, Purdue University, Department of Economics.
    • Handle: RePEc:pur:prukra:1114
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