Advertisement

European Journal of Law and Economics

, Volume 27, Issue 3, pp 285–308 | Cite as

Regulated and unregulated insider trading around earnings announcements

  • Juha-Pekka Kallunki
  • Henrik Nilsson
  • Janne PeltoniemiEmail author
Article

Abstract

This paper analyses insider trading behaviour around annual and interim earnings announcements during changing legislative environments in Sweden from 1980 to 2003. Using a unique data set, we are able to explore the nature of insider trading patterns from unregulated to strongly regulated insider trading markets. We find limited evidence of opportunistic insider trading. Insiders seem to be reluctant to sell stocks before positive earnings announcements. They also tend to time their trades in conjunction with an immediate post-announcement period, i.e. “safety trading”, which becomes more evident within stronger legislation environments. Some support for contrarian trading behaviour is also found.

Keywords

Insider trading Earnings announcements Legislation 

JEL Classification

D82 G32 M40 K42 

Notes

Acknowledgements

We are grateful to professor Allan Hodgson and the anonymous referee for their helpful comments. We would also like to thank Elisa Vesikukka for her help in gathering data and the Swedish Financial Supervisory Authority for providing insider data.

References

  1. Aboody, D., & Lev, B. (2000). Information asymmetry, R&D, and insider gains. The Journal of Finance, 55(6), 2747–2766.CrossRefGoogle Scholar
  2. Allen, S., & Ramanan, R. (1995). Insider trading, earnings changes, and stock prices. Management Science, 41, 653–668.CrossRefGoogle Scholar
  3. Bainbridge, S. (2000). Insider trading. In B. Bouckaert & G. De Geest (Eds.), Encyclopedia of law and economics, volume 3. The regulation of contracts (pp. 772–812). Cheltenham: Edward Elgar Publishing.Google Scholar
  4. Bettis, J. C., Coles, J. L., & Lemmon, M. L. (2000). Corporate policies restricting trading by insiders. Journal of Financial Economics, 57(2), 191–200. doi: 10.1016/S0304-405X(00)00055-6.CrossRefGoogle Scholar
  5. Bhattacharya, U., Daouk, H., Jorgenson, B., & Kehr, C.-H. (2000). When an event is not an event: The curious case of an emerging market. Journal of Financial Economics, 55(1), 69–101. doi: 10.1016/S0304-405X(99)00045-8.CrossRefGoogle Scholar
  6. Carlton, D. W., & Fischel, D.-R. (1983). The regulation of insider trading. Stanford Law Review, 35, 857–895. doi: 10.2307/1228706.CrossRefGoogle Scholar
  7. Elliot, J., Morse, D., & Richardson, G. (1984). The association between insider trading and information announcements. RAND Journal of Economics, 15, 521–536. doi: 10.2307/2555523.CrossRefGoogle Scholar
  8. Finnerty, J. (1976). Insiders and market efficiency. The Journal of Finance, 31, 1141–1148. doi: 10.2307/2326279.CrossRefGoogle Scholar
  9. Fishman, M. J., & Hagerty, K. M. (1992). Insider trading and the efficiency of stock prices. RAND Journal of Economics, 23, 106–122. doi: 10.2307/2555435.CrossRefGoogle Scholar
  10. Frankel, R., & Li, X. (2002). The characteristics of a firm’s information environment and the predictive ability of insider trades. Working paper, MIT Sloan School of Management.Google Scholar
  11. Garfinkel, J. A. (1997). New evidence on the effects of federal regulations on insider trading: The Insider Trading and Securities Fraud Enforcement Act (ITSFEA). Journal of Corporate Finance, 3, 89–111. doi: 10.1016/S0929-1199(96)00009-0.CrossRefGoogle Scholar
  12. Givoly, D., & Palmon, D. (1985). Insider trading and the exploitation of inside information: Some empirical evidence. Journal of Business, 58, 69–87. doi: 10.1086/296283.CrossRefGoogle Scholar
  13. Hirschey, M., & Zaima, J. (1989). Insider trading, ownership structure, and the market assessment of corporate sell-offs. The Journal of Finance, 44, 971–980. doi: 10.2307/2328619.CrossRefGoogle Scholar
  14. Huddart, S., Ke, B., & Shi, C. (2007). Jeopardy, non-public information, and insider trading around SEC 10-K and 10-Q filings. Journal of Accounting and Economics, 43, 3–36. doi: 10.1016/j.jacceco.2006.06.003.CrossRefGoogle Scholar
  15. Ikenberry, D., Lakonishok, J., & Vermaelen, T. (1995). Market underreaction to open market share repurchases. Journal of Financial Economics, 39, 181–208. doi: 10.1016/0304-405X(95)00826-Z.CrossRefGoogle Scholar
  16. Jaffe, J. (1974). Special information and insider trading. Journal of Business, 47, 410–428. doi: 10.1086/295655.CrossRefGoogle Scholar
  17. Jeng, L., Metrick, A., & Zeckhauser, R. (2003). The profits to insider trading: A performance-evaluation perspective. The Review of Economics and Statistics, 85(2), 453–471.CrossRefGoogle Scholar
  18. John, K., & Lang, L. (1991). Strategic insider trading around dividend announcements: Theory and evidence. The Journal of Finance, 46, 1361–1389. doi: 10.2307/2328862.CrossRefGoogle Scholar
  19. Karpov, J., & Lee, D. (1991). Insider trading before new issue announcements. Financial Management, 20, 18–26. doi: 10.2307/3666093.CrossRefGoogle Scholar
  20. Ke, B., Huddart, S., & Petroni, K. (2003). What insiders know about future earnings and how they use it: Evidence from insider trades. Journal of Accounting and Economics, 35, 315–346.CrossRefGoogle Scholar
  21. Lakonishok, L., & Lee, I. (2001). Are insider trades informative? The Review of Financial Studies, 14(1), 79–111. doi: 10.1093/rfs/14.1.79.CrossRefGoogle Scholar
  22. Leland, H. E. (1992). Insider trading: Should it be prohibited? Journal of Political Economy, 100, 859–887. doi: 10.1086/261843.CrossRefGoogle Scholar
  23. Lin, J., & Howe, J. (1990). Insider trading in the OTC market. The Journal of Finance, 45, 1273–1284. doi: 10.2307/2328724.CrossRefGoogle Scholar
  24. Linciano, N. (2003). The effectiveness of insider trading regulation in Italy. Evidence from stock-price run-ups around announcements of corporate control transactions. European Journal of Law and Economics, 16(2), 199–218. doi: 10.1023/A:1024168309586.CrossRefGoogle Scholar
  25. Loughran, T., & Ritter, J. R. (1995). The new issue puzzle. The Journal of Finance, 50, 23–51. doi: 10.2307/2329238.CrossRefGoogle Scholar
  26. Meulbroek, L. K. (1992). An empirical analysis of illegal insider trading. The Journal of Finance, 47, 1661–1700. doi: 10.2307/2328992.CrossRefGoogle Scholar
  27. Manne, H. (1966). Insider trading and the stock market. New York: Free Press.Google Scholar
  28. Newkirk, T. C., & Robertson, M. A. (1998). Speech by SEC staff: Insider trading—A U.S. perspective. www.sec.gov/news/speech/speecharchive/1998/spch221.htm.
  29. Nilsson, M. (1994). Insiderlagen [The Insider Law in Swedish]. Stockholm: Juristförlaget.Google Scholar
  30. Nilsson, H. (2005). Accounting based trading strategies and insider trading. Working paper, University of Umeå.Google Scholar
  31. Noe, C. F. (1999). Voluntary disclosures and insider transactions. Journal of Accounting and Economics, 27, 305–326. doi: 10.1016/S0165-4101(99)00014-2.CrossRefGoogle Scholar
  32. Penman, S. (1982). Insider trading and the dissemination of firms’ forecast information. Journal of Business, 55, 479–503. doi: 10.1086/296177.CrossRefGoogle Scholar
  33. Roulstone, D. T. (2006). Insider trading and the information content of earnings announcements. Working paper, University of Chicago.Google Scholar
  34. Rozeff, M. S., & Zaman, M. A. (1988). Market efficiency and insider trading: New evidence. Journal of Business, 61, 25–44. doi: 10.1086/296418.CrossRefGoogle Scholar
  35. Rozeff, M. S., & Zaman, M. A. (1998). Overreaction and insider trading: Evidence from growth and value portfolios. Journal of Finance, 53, 701–716. doi: 10.1111/0022-1082.275500.CrossRefGoogle Scholar
  36. Rundfelt, R. (1984). Insideraffärer och Börsetik. Stockholm: SNS förlag.Google Scholar
  37. Rundfelt, R. (1989). Insiders affärer: om bruk och missbruk av information om börsbolag. SNS förlag.Google Scholar
  38. Seyhun, H. N. (1986). Insiders’ profits, costs of trading, and market efficiency. Journal of Financial Economics, 16, 189–212. doi: 10.1016/0304-405X(86)90060-7.CrossRefGoogle Scholar
  39. Seyhun, H. N. (1988). The information content of aggregate insider trading. Journal of Business, 61, 1–24. doi: 10.1086/296417.CrossRefGoogle Scholar
  40. Seyhun, H. N. (1990). Do bidder managers knowingly pay too much for target firms? Journal of Business, 63, 439–464. doi: 10.1086/296516.CrossRefGoogle Scholar
  41. Seyhun, H. N. (1992). The effectiveness of the insider-trading sanctions. Journal of Law and Economics, 35, 149–182. doi: 10.1086/467248.CrossRefGoogle Scholar
  42. Seyhun, H. N. (1998). Investment intelligence: From insider trading. Cambridge, MA: MIT Press.Google Scholar
  43. SFS 1971:827 Law about registration of shares (ARL).Google Scholar
  44. SFS 1985:571 The securities market law (VPL).Google Scholar
  45. SFS 1990:1342 The insider law.Google Scholar
  46. SFS 2000:1086 The insider penal act.Google Scholar
  47. SFS 2000:1087 The Act Concerning Reporting Obligations for Certain Financial Instruments.Google Scholar
  48. Sivakumar, K., & Waymire, G. (1994). Insider trading following material news events: Evidence from earnings. Financial Management, 23, 23–32. doi: 10.2307/3666053.CrossRefGoogle Scholar
  49. Udpa, S. C. (1996). Insider trading and the information content of earnings. Journal of Business Finance and Accounting, 23, 1069–1095. doi: 10.1111/j.1468-5957.1996.tb01159.x.CrossRefGoogle Scholar
  50. Wahlström, G. (2003). Legal insider trading and abnormal returns: Some empirical evidence from Sweden. Belgian Journal of Banking and Finance, 6(4).Google Scholar
  51. Wesser, E. (2001). Har du varit ut och shoppat Jacob? En studie av finansinspektionens utredning av insiderbrott under 1990-talet [Have you been out shopping Jacob? A study of insider investigations by the Swedish Financial Supervisory Authority during the 1990s]. Ph.D. thesis, University of Lund (in Swedish).Google Scholar

Copyright information

© Springer Science+Business Media, LLC 2008

Authors and Affiliations

  • Juha-Pekka Kallunki
    • 1
  • Henrik Nilsson
    • 2
  • Janne Peltoniemi
    • 1
    Email author
  1. 1.Department of Accounting and FinanceUniversity of OuluOuluFinland
  2. 2.Department of Accounting and FinanceUmeå School of BusinessUmeåSweden

Personalised recommendations