The Private Information Trading and Its Influencing Factors prior to Earning Forecast Announcements
Date Issued
2007
Date
2007
Author(s)
Liu, Yi-Hsin
DOI
zh-TW
Abstract
There were rumors now and then about adjusting the shareholding by the management of corporations prior to the disclosure of vital information, thus acquire huge returns after the announcement. More than a half of listed companies in Taiwan are controlled by the families. The majority shareholders exploit their information superiority to expropriate the minority shareholders. This would harm the long term development of capital market. Intended to enhance the financial transparency, Taiwan’s Securities and Futures Bureau previously mandated the disclosure of financial forecast prior to major changes in corporation during 1991 to 2004, with anticipation to reduce the information asymmetry between the investors and the management. Meanwhile the authority requests the internal personnel to publicly report the shareholding changes, demanding the company to exercise the disgorgement on short-term trading of inside personnel, and appreciably increased the penalties and fines of insider trading. Owing to the strict criterions for insider trading by law, dummy accounts flooding the Taiwan capital market, resulted in low prosecuting and even lower conviction rates. Insider trading could not be eliminated in Taiwan. This study aims to investigate whether the information superiors would exploit the timing of earnings forecast announcement to progress private informed trades through conscientious and profound statistical modeling. The effect of ownership structure and board structure on the returns of private informed trades is also to be elucidated.
Market statistics and financial information of listed companies during 1987 to 2006 were studied via event study methodology. The hypothesis of significant increase for informed trades was tested via the correlation between accumulated abnormal returns and abnormal turnover rates during event window. Further dividing the samples into bull market and bear market, we studied the effect on the trading incentives by earning forecast announcement. Pooled fixed year effects, as well as testing of individual year, were applied with the aide of threshold regression to investigate the effect on private informed trades by information asymmetry. Generalized Estimating Equations were further applied to test the related hypotheses of ownership structure, avoiding the clustered samples to influence the estimation of regression parameters, and therefore the power of test.
The results show that both pooled effects and individual year estimate lead to the same conclusion that the primary trading incentives being risk sharing during observation period. But the private informed trades increase significantly at event window (starting from 20 days prior to earning forecast disclosure), and this phenomena became more evident in bear market than bull market. Voluntary forecast induces more private informed trades than mandatory ones. The trading system of stock market and anticipated legal cost would hypothetically provoke more private informed trades by positive news rather than negative ones. Threshold regression indicates that 66% of observations (82% in bull market) have the phenomenon of increasing information trades at event window. The returns of private informed trades will be significantly enlarged especially when the anticipated earning by the company is opposite to the trend of economy.
This study also reveals that ownership structure has significant effect on the profit of private informed trades. The cash flow right (CFR) by family has the incentive effect. The profit of private informed trades diminishes as family ownership increases. The larger the deviation of ownership by family from cash flow right (CFR), the greater projected profit from information trades, which direct to the entrenchment effect. Institutional investors, being another category of information superiors, would increase the stock price respondence prior to earning forecast announcement. Most influential institutional investors are trust funds. The family members on board structure have the positive effect on the returns of private informed trades, yet fail to reach significance. Independent board members have insignificant effect on stock price respondence prior to earning forecast announcement.
Subjects
盈餘預測
股權結構
Private information trading
Earnings forecast
Ownership structure
Type
other
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