Insider Trading and Stock Splits

48 Pages Posted: 19 Mar 2012 Last revised: 31 Jul 2012

See all articles by Vinh Nguyen

Vinh Nguyen

Indiana University Bloomington - School of Public & Environmental Affairs (SPEA)

Anh Tran

Indiana University Bloomington - School of Public & Environmental Affairs (SPEA)

Richard J. Zeckhauser

Harvard University - Harvard Kennedy School (HKS); National Bureau of Economic Research (NBER)

Date Written: July 30, 2012

Abstract

Stock splits have long presented a puzzle in finance. Unresolved questions are why do firms undertake them, and why do they offer abnormal returns both before and after the announcement date? Conventional explanations focus on making stocks more liquid and signaling firm prospects. However, abnormal returns, particularly before the announcement date, should raise strong suspicions of insider trading. We examined 718 split events in the emerging stock market of Vietnam and found evidence indicating illegal insider trading in stock splits by firms more vulnerable to inappropriate insider activity. Such firms were more likely to be split stocks. Their stocks also provided significantly higher returns when they did split than did other stocks. More telling, the abnormal returns prior to the split announcement for these stocks were extremely high, indeed higher than their post-announcement abnormal returns. This is precisely the pattern we would expect if insiders traded on their knowledge. Illegal insider trading, where it is possible to escape penalty, provides a new explanation for stock splits and their abnormal returns.

Keywords: illegal insider trading, stock split, state ownership, emerging market, signaling

JEL Classification: G32, G15, G34

Suggested Citation

Nguyen, Vinh and Tran, Anh and Zeckhauser, Richard J., Insider Trading and Stock Splits (July 30, 2012). Available at SSRN: https://ssrn.com/abstract=2024101 or http://dx.doi.org/10.2139/ssrn.2024101

Vinh Nguyen

Indiana University Bloomington - School of Public & Environmental Affairs (SPEA) ( email )

1315 East Tenth Street
Room 310
Bloomington, IN 47405
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812-369-6261 (Phone)

Anh Tran

Indiana University Bloomington - School of Public & Environmental Affairs (SPEA) ( email )

1315 East Tenth Street
Bloomington, IN 47405
United States

Richard J. Zeckhauser (Contact Author)

Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States
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617-384-9340 (Fax)

National Bureau of Economic Research (NBER) ( email )

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617-496-3783 (Fax)

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