Three Essays on Insider Trading

• Author / Creator

  Tang, Zhenyang

• The first essay of the thesis examines the effect of legal insider trading intensity on stock price informativeness. Open market transactions by corporate insiders are considered informative because they predict future stock returns and future firm-specific cash flows. As a result, it may seem natural to assume a positive association between the intensity of reported insider trading and stock price informativeness. However, it is also possible that insider trading discourages outsiders from information collection, and the overall informational efficiency may be lowered if outsider information collection is crowded out. I find that firms with higher insider trading intensity tend to have higher firm-specific return variation. Stocks of firms with higher insider trading intensity experience less negative abnormal returns around SEO announcements, and are less affected by long-term return reversal. The findings support the view that legal insider trading makes stock prices more informative.
  The second essay investigates whether insider trading affects firm value. If insider trading intensity promotes informational efficiency, it may enhance firm value by lowering cost of capital. I find that firms with larger and more frequent insider trading have higher values of Tobin’s q, after accounting for other determinants of firm value. The positive associations are robust if only insider purchases or sales are analyzed, and are stronger for firms with higher information asymmetry. The incidence of firm-level insider trading restrictions is negatively associated with Tobin’s q. Consistent with the view that the intensity of legal insider trading affects firm value by lowering cost of capital, I find a negative association between insider trading intensity and implied cost of capital.
  The third essay investigates how insider trading affects price formation prior to mergers and acquisitions. I find that about one third of the total price run-up in M&As occurs before announcements, and the pre-announcement price run-up does not seem to be caused by market anticipation or trading reported by corporate insiders. Instead, the pre-announcement price run-up is significantly larger when media attention on insider trading is lower, when institutional ownership is lower, and when probability of informed trading is higher. The findings are consistent with the view that the target stock price run-up prior to M&A announcements is caused by unreported illegal insider trading.

• Subjects / Keywords

  • Insider trading
  • Firm value
  • Stock price informativeness

• Graduation date

  Fall 2014

• Type of Item

  Thesis

• Degree

  Doctor of Philosophy

• DOI

  https://doi.org/10.7939/R33B5WH0M

• License

  This thesis is made available by the University of Alberta Libraries with permission of the copyright owner solely for non-commercial purposes. This thesis, or any portion thereof, may not otherwise be copied or reproduced without the written consent of the copyright owner, except to the extent permitted by Canadian copyright law.