Why does Shareholder Protection Matter for Abnormal Returns after Reported Insider Purchases and Sales?

64 Pages Posted: 18 Feb 2009 Last revised: 23 Dec 2019

See all articles by Jana P. Fidrmuc

Jana P. Fidrmuc

Warwick Business School - Finance Group

Adriana Korczak

University of Bristol - School of Economics, Finance and Management

Piotr Korczak

University of Bristol - Department of Finance and Accounting

Date Written: June 18, 2012

Abstract

We use a unique data set of more than 240,000 reported insider transactions across 15 European countries and the USA to analyze the link between country-level shareholder protection and abnormal returns following insider trades. We show that abnormal returns after insider transactions are positively correlated with country-level shareholder protection against expropriation by corporate insiders, which supports the information-content hypothesis. Market reaction to insider purchases increases with shareholder protection because shareholder protection enhances the transparency and trustworthiness of insiders’ actions, and limits possibilities for direct profit diversion, so that more information is eventually reflected in stock prices. For insider sales, shareholder protection decreases their negative information content. We conjecture that this is due to the effect of greater transparency and trustworthiness strengthening the diversification and liquidity reasons for selling in better shareholder protection countries. We find limited support for the rent-extraction hypothesis, which conjectures that shareholder protection is associated with insider trading dollar profits.

Keywords: Shareholder protection, Insider trades, Rent extraction, Information content

JEL Classification: G14, G34

Suggested Citation

Fidrmuc, Jana P. and Korczak, Adriana and Korczak, Piotr, Why does Shareholder Protection Matter for Abnormal Returns after Reported Insider Purchases and Sales? (June 18, 2012). WBS Finance Group Research Paper No. 113, Available at SSRN: https://ssrn.com/abstract=1344042 or http://dx.doi.org/10.2139/ssrn.1344042

Jana P. Fidrmuc

Warwick Business School - Finance Group ( email )

Warwick Business School
Coventry CV4 7AL
United Kingdom

Adriana Korczak

University of Bristol - School of Economics, Finance and Management ( email )

8 Woodland Road
Bristol, BS8 1TN
United Kingdom
+441173941490 (Phone)

Piotr Korczak (Contact Author)

University of Bristol - Department of Finance and Accounting ( email )

8 Woodland Road
Bristol BS8 1TN
United Kingdom
+44 117 394 1491 (Phone)

HOME PAGE: http://sites.google.com/view/piotrkorczak/home

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