The Relation between Insider Positions and Insider Trading Profitability
Date Issued
2011
Date
2011
Author(s)
Chen, Yi-Ting
Abstract
In this paper, I investigate the relationship between insiders’ positions and insider trading profitability. I examine insiders’ trades of all publicly traded companies in the U.S. during the 2001-2006 period. First, I test whether the position an insider holds affects the profitability of his trades. I find that insider trades initiated by CFOs exhibit the best ability to predict abnormal stock return and profit per share following their trades.
Second, I investigate whether R&D activities influences insider trading profitability. I use a dummy variable RD to identify whether the firm engages in any R&D activities and use RD_RATIO to measure the intensity of R&D activities. Results from this test are consistent with R&D activities increases information asymmetry among insiders. Moreover, results from selling-trades are more significant than buying-trades.
Finally, I investigate whether the enactment of Sarbanes-Oxley Act of 2002(SOX) affects insider trading profitability. I find that SOX only dampens the profitability derived from insider selling-trades. Specifically, insiders avoided less loss from selling activities in the post-SOX period. However, insider buying-trades predict greater profits in the post-SOX period. As result, the efficacy of SOX is limited to insider selling-trades.
Subjects
Insider trading
Cumulative Abnormal Return
Profit per shares
R&D activities
Sarbanes-Oxley Act
Type
thesis
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