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Evidence of the contribution of legal insider trading to market efficiency

Author

Listed:
  • 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

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.

Suggested Citation

  • AKTAS, Nihat & DE BODT, Eric & VAN OPPENS, Hervé, 2007. "Evidence of the contribution of legal insider trading to market efficiency," CORE Discussion Papers 2007014, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  • Handle: RePEc:cor:louvco:2007014
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    File URL: http://www.uclouvain.be/cps/ucl/doc/core/documents/coredp2007_14.pdf
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    Cited by:

    1. Jinhua Cui & Hoje Jo & Yan Li, 2015. "Corporate Social Responsibility and Insider Trading," Journal of Business Ethics, Springer, vol. 130(4), pages 869-887, September.
    2. Peter-Jan Engelen & Luc Liedekerke, 2007. "The Ethics of Insider Trading Revisited," Journal of Business Ethics, Springer, vol. 74(4), pages 497-507, September.

    More about this item

    Keywords

    legal insider trading; market efficiency; order imbalance;

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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