Insider Trading and Corporate Governance: International Evidence
Speaker
Abstract
| We position the paper around a simple question: What is the effect of corporate governance institutions on market reaction to insider trading in a cross-section of developed countries? This kind of analysis provides insights into functioning of financial markets, information flow and asymmetries, price discovery process and their relation to country-wide corporate governance institutions. We put forward two alternative hypotheses with opposite predictions. First, good corporate governance institutions may have positive effect on price adjustments after insider trading announcements. This is because insiders' actions in countries with better corporate governance institutions are more credible and therefore precision of information conveyed in insider trading announcements is higher and prices adjust more after insider trading disclosures. Second, better corporate governance may decrease information content of insider trading due to higher precision of information about underlying firm value just before an insider trading announcement in countries with better corporate governance. More information incorporated in prices just before insiders trade is then associated with lower price adjustments after a disclosure of insider trading. Our analysis on a unique data set of reported insider purchases and sales across 15 European countries and the U.S. shows that better corporate governance institutions are associated with stronger market reaction to insider purchases. This indicates that the positive effect of corporate governance on the precision of disclosure information dominates the positive effect corporate governance has on precision of previous information before the disclosure. The relation is however not symmetrical for purchases versus sales. The market reaction to insider sales is milder in better corporate governance countries. As an additional contribution to the literature, our analysis shows that market stock price adjustments after insider trading reflect both the fact that insiders are contrarian and also that they possess superior information. |
| The Erasmus Finance Seminar is jointly sponsored by ERIM and the Tinbergen Institute. |
| Contact information: |
| Viorel Roscovan |
