To Trade or Not to Trade: The Strategic Trading of Insiders Around News Announcements

39 Pages Posted: 12 May 2010

See all articles by Adriana Korczak

Adriana Korczak

University of Bristol - School of Economics, Finance and Management

Piotr Korczak

University of Bristol - Department of Finance and Accounting

Meziane Lasfer

Bayes Business School, City, University of London

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Date Written: 2009-11

Abstract

We argue that insiders' decisions to trade in short windows before news announcements are likely to result from a trade-off between the incentives to capitalize on the foreknowledge of the disclosure and the risk of regulatory scrutiny and reputation loss. We provide evidence that the decision of insiders to buy is driven by this trade-off. We show that insiders strategically choose the amount of shares bought ahead of good news announcements, as they increase their purchases when the price impact of the news goes up, but the amount of shares purchased levels off as the news becomes extreme. In contrast, their sell trades are primarily influenced by the deterring effect of the regulatory and reputation risks, as the probability of their sell trades decreases significantly with the price impact of the forthcoming bad news. To further support our arguments on the importance of incentives and disincentives to trade, we show that the strategic trading is mainly observed in the most price-sensitive groups of news announcements, and is clearly pronounced for best informed executives (CEOs), and that the trading patterns change with changes in regulations, and insiders with higher reputational risk limit their trading ahead of bad news.

Suggested Citation

Korczak, Adriana and Korczak, Piotr and Lasfer, Meziane, To Trade or Not to Trade: The Strategic Trading of Insiders Around News Announcements (2009-11). Journal of Business Finance & Accounting, Vol. 37, Issue 3-4, pp. 369-407, April/May 2010, Available at SSRN: https://ssrn.com/abstract=1604803 or http://dx.doi.org/10.1111/j.1468-5957.2010.02185.x

Adriana Korczak

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

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

Piotr Korczak

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

Meziane Lasfer

Bayes Business School, City, University of London ( email )

106 Bunhill Row
London, EC1Y 8TZ
Great Britain
+44 20 7040 8634 (Phone)
+44 20 7040 8881 (Fax)

HOME PAGE: http://https://www.bayes.city.ac.uk/faculties-and-research/experts/meziane-lasfer

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