Innovative Efficiency and Insider Trading: Korea Evidence
19 Pages Posted: 22 Aug 2016
Date Written: August 18, 2016
This paper investigates whether corporate insiders earn excess profits by using private information unknown to outside investors or by trading their own firms’ stock based on contrarian belief.
Examining insider trades in the Korea stock market from 2005 to 2014, I document that both the use of private information and insiders’ contrarian investment strategy have effect on insider trading. This implies that insiders time the market with contrarian investment strategy and at the same time exploit private information to earn abnormal returns. I also find the asymmetric effect of insider trading.
Insiders trade shares more heavily when they possess good news about future firm value or feel that their companies are undervalued than when they possess bad news or feel that their companies are overvalued. Providing new evidence that insider trading profits are affected by both the use of private information and contrarian investment strategy, I suggest that regulators should consider both factors in the regulation of insider trading.
Keywords: insider trade, innovative efficiency, private information
JEL Classification: D82, G14
Suggested Citation: Suggested Citation