Market Efficiency and Insider Trading: New Evidence
Michael S. Rozeff
SUNY at Buffalo - Department of Financial & Managerial Economics
Mir A. Zaman
University of Northern Iowa - Department of Finance
Journal of Business, January, pp. 25-44, 1988
It is not surprising that corporate insiders earn profits from trading their stocks, but it is surprising that outsiders can earn abnormal returns by mimicking the insider trades using publically available information. We suggest that these anomalous returns are explained by the size and price/earnings ratio effects. Controlling for these factors reduces outsider profits by one-half. The additional assumption of 2 percent transactions costs makes outsider profits zero or negative. Measured insider profits are also greatly reduced by controlling for size and price/earnings effects. Insider profits are a modest 3 percent per annum after deducting a 2 perecnt transactions costs fee.
Number of Pages in PDF File: 20
Keywords: insider trading, market efficiency, size and price/earnings effects
JEL Classification: G14Accepted Paper Series
Date posted: May 22, 2006
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