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Legal insider trading and stock market liquidity

Author

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  • Degryse, Hans

    (Tilburg University, School of Economics and Management)

  • de Jong, Frank

    (Tilburg University, School of Economics and Management)

  • Lefebvre, J.J.G.

    (Tilburg University, School of Economics and Management)

Abstract

This paper assesses the impact of legal trades by corporate insiders on the liquidity of the firm’s stock. For this purpose, we analyze two liquidity measures and one information asymmetry measure. The analysis allows us to study as well the effect of a change in insider trading regulation, namely the implementation of the Market Abuse Directive (European Union Directive 2003/6/EC) on the Dutch stock market. The first set of results shows that, in accordance with theories of asymmetric information, the intensity of legal insider trading in a given company is positively related to the bid-ask spread and to the information asymmetry measure. We also find that the Market Abuse Directive did not reduce significantly this effect. Secondly, analyzing liquidity and information asymmetry around the days of legal insider trading, we find that small and large capitalization stocks see their bid-ask spread and the permanent price impact increase when insiders trade. For mid-cap stocks, only the permanent price impact increases. Finally, we could not detect a significant improvement of these results following the change in regulation. Copyright The Author(s) 2016
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Degryse, Hans & de Jong, Frank & Lefebvre, J.J.G., 2016. "Legal insider trading and stock market liquidity," Other publications TiSEM 1f14bad3-7bb3-4fd2-bb4d-b, Tilburg University, School of Economics and Management.
    • Handle: RePEc:tiu:tiutis:1f14bad3-7bb3-4fd2-bb4d-b9f160cc86eb
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    References listed on IDEAS

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    Cited by:

    1. Nimalendran, Mahendrarajah & Rzayev, Khaladdin & Sagade, Satchit, 2024. "High-frequency trading in the stock market and the costs of options market making," LSE Research Online Documents on Economics 124228, London School of Economics and Political Science, LSE Library.
    2. Brijs, Tom & De Jonghe, Cedric & Hobbs, Benjamin F. & Belmans, Ronnie, 2017. "Interactions between the design of short-term electricity markets in the CWE region and power system flexibility," Applied Energy, Elsevier, vol. 195(C), pages 36-51.
    3. Michael Buchner & Tobias A. Jopp, 2019. "Full steam ahead: Insider knowledge, stock trading and the nationalization of the railways in Prussia around 1879," Working Papers 0151, European Historical Economics Society (EHES).

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    More about this item

    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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