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Stock Price Around the Trades of Corporate Insider on the London Stock Exchange

Listed author(s):
  • John Matatko
  • Alan Gregory
  • Ian Tonks

    ()

  • Sylvain Friederich

    ()

This paper examines the patterns of security returns around trades by corporate insiders in the shares of their own company. We find patterns in abnormal returns in the days around a directors trade that are consistent with directors engaging in short-term market timing: they sell (buy) after an increase (decline) in prices, and their trades are followed by a partial price reversal. This provides strong evidence that directors trade to exploit patterns in share prices. We also find positive gross, but not net, abnormal returns to imitating some of the trades of directors once transactions costs implicit in the bid ask spread are taken into account. We also report that some types of trades have superior predictive content for future returns. An important difference with previous work on this topic is that we find that medium-sized trades are more informative for short-term returns than large ones, consistent with Barclay and Warners (1993) ¶stealth trading¶ hypothesis.

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File URL: http://www.lse.ac.uk/fmg/workingPapers/discussionPapers/fmg_pdfs/dp332.pdf
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Paper provided by Financial Markets Group in its series FMG Discussion Papers with number dp332.

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Date of creation: Aug 1999
Handle: RePEc:fmg:fmgdps:dp332
Contact details of provider: Web page: http://www.lse.ac.uk/fmg/

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  1. Scholes, Myron & Williams, Joseph, 1977. "Estimating betas from nonsynchronous data," Journal of Financial Economics, Elsevier, vol. 5(3), pages 309-327, December.
  2. Fowler, David J. & Rorke, C. Harvey, 1983. "Risk measurement when shares are subject to infrequent trading : Comment," Journal of Financial Economics, Elsevier, vol. 12(2), pages 279-283, August.
  3. Lee, Inmoo, 1997. " Do Firms Knowingly Sell Overvalued Equity?," Journal of Finance, American Finance Association, vol. 52(4), pages 1439-1466, September.
  4. Kabir, Rezaul & Vermaelen, Theo, 1996. "Insider trading restrictions and the stock market: Evidence from the Amsterdam Stock Exchange," European Economic Review, Elsevier, vol. 40(8), pages 1591-1603, November.
  5. Meulbroek, Lisa K, 1992. " An Empirical Analysis of Illegal Insider Trading," Journal of Finance, American Finance Association, vol. 47(5), pages 1661-1699, December.
  6. Allen, Franklin & Gale, Douglas, 1992. "Stock-Price Manipulation," Review of Financial Studies, Society for Financial Studies, vol. 5(3), pages 503-529.
  7. Binder, John J, 1998. "The Event Study Methodology since 1969," Review of Quantitative Finance and Accounting, Springer, vol. 11(2), pages 111-137, September.
  8. Corrado, Charles J., 1989. "A nonparametric test for abnormal security-price performance in event studies," Journal of Financial Economics, Elsevier, vol. 23(2), pages 385-395, August.
  9. Boehmer, Ekkehart & Masumeci, Jim & Poulsen, Annette B., 1991. "Event-study methodology under conditions of event-induced variance," Journal of Financial Economics, Elsevier, vol. 30(2), pages 253-272, December.
  10. H. Nejat Seyhun, 1992. "Why Does Aggregate Insider Trading Predict Future Stock Returns?," The Quarterly Journal of Economics, Oxford University Press, vol. 107(4), pages 1303-1331.
  11. Admati, Anat R & Pfleiderer, Paul, 1988. "Selling and Trading on Information in Financial Markets," American Economic Review, American Economic Association, vol. 78(2), pages 96-103, May.
  12. Brown, Stephen J. & Warner, Jerold B., 1985. "Using daily stock returns : The case of event studies," Journal of Financial Economics, Elsevier, vol. 14(1), pages 3-31, March.
  13. Bagnoli, Mark & Khanna, Naveen, 1992. " Insider Trading in Financial Signaling Models," Journal of Finance, American Finance Association, vol. 47(5), pages 1905-1934, December.
  14. Barclay, Michael J. & Warner, Jerold B., 1993. "Stealth trading and volatility : Which trades move prices?," Journal of Financial Economics, Elsevier, vol. 34(3), pages 281-305, December.
  15. Cowan, Arnold R. & Sergeant, Anne M. A., 1996. "Trading frequency and event study test specification," Journal of Banking & Finance, Elsevier, vol. 20(10), pages 1731-1757, December.
  16. Campbell, Cynthia J. & Wesley, Charles E., 1993. "Measuring security price performance using daily NASDAQ returns," Journal of Financial Economics, Elsevier, vol. 33(1), pages 73-92, February.
  17. Alan Gregory & John Matatko & Ian Tonks, 1997. "Detecting Information from Directors' Trades: Signal Definition and Variable Size Effects," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 24(3), pages 309-342.
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