Do what insiders do: Abnormal performances after the release of insiders' relevant transactions
Abstract
Purpose
This paper aims to investigate the main motivations for Italian insiders to trade relevant stakes of their companies, specifically assuming that most transactions are driven by speculative intents. According to an information asymmetry hypothesis, insiders, having a superior information set, may better detect the temporary under or overvaluation of stocks. Moreover, when insider trading law is not well enforced, insiders may take advantage of relevant and undisclosed information. In both cases, such transactions would convey an important signal to uninformed traders.
Design/methodology/approach
In order to determine whether insiders are able to earn abnormal returns, a standard event study methodology is used and, then, a profitable mimicking portfolio strategy is proposed.
Findings
The paper finds statistical evidence of a positive relationship between the change of holdings and the sign of market movement: excess returns are earned after a positive increase of relevant stakes and negative abnormal returns follow an opposite insiders' strategy. In particular, we find significant excess returns between the first and the third month following insiders' transactions. Market response is generally higher for insiders' purchases rather than sales and for insiders owning more than 50 per cent of the company.
Research limitations/implications
As at European level laws on insider trading have been updated recently, future research could study this phenomenon after 2002, investigating if new laws were able to guarantee strong efficiency of the Italian market.
Originality/value
This paper is interesting because it is one of the few studies on insider trading carried out outside the USA.
Keywords
Citation
Bajo, E. and Petracci, B. (2006), "Do what insiders do: Abnormal performances after the release of insiders' relevant transactions", Studies in Economics and Finance, Vol. 23 No. 2, pp. 94-118. https://doi.org/10.1108/10867370610683905
Publisher
:Emerald Group Publishing Limited
Copyright © 2006, Emerald Group Publishing Limited