Market Efficiency and Insider Trading: New Evidence

Rozeff, Michael S.; Zaman, Mir A.

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Market Efficiency and Insider Trading: New Evidence

Journal of Business, January, pp. 25-44, 1988

20 Pages Posted: 22 May 2006

See all articles by Michael S. Rozeff

Michael S. Rozeff

SUNY at Buffalo - Department of Financial & Managerial Economics

Mir A. Zaman

University of Northern Iowa - Department of Finance

Abstract

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.

Keywords: insider trading, market efficiency, size and price/earnings effects

JEL Classification: G14

Suggested Citation: Suggested Citation

Rozeff, Michael S. and Zaman, Mir, Market Efficiency and Insider Trading: New Evidence. Journal of Business, January, pp. 25-44, 1988, Available at SSRN: https://ssrn.com/abstract=903468