Strategic illegal insider trading prior to price sensitive announcements
| DOI | https://doi.org/10.1108/13590791111147460 |
| Pages | 247-253 |
| Date | 19 July 2011 |
| Published date | 19 July 2011 |
| Author | Thomas H. McInish,Alex Frino,Frank Sensenbrenner |
| Subject Matter | Accounting & finance |
Strategic illegal insider trading
prior to price sensitive
announcements
Thomas H. McInish
The University of Memphis, Memphis, Tennessee, USA
Alex Frino
University of Sydney, Sydney, Australia, and
Frank Sensenbrenner
Capital Markets Co-operative Research Centre and University of Sydney,
Sydney, Australia
Abstract
Purpose – Using data for actual insider trading cases prosecuted by the Securities and Exchange
Commission, the paper aims to investigate whether insiders trade strategically to avoid detection.
Design/methodology/approach – The paper analyzes actual insider trades prior to price sensitive
announcements.
Findings – It is found that insiders are more likely to trade on high volume days, which indicates an
effort to hide their trades. Further, insider trading raises the number of days with abnormally high
trading volume only slightly, again indicating that insiders are avoiding attracting attention.
No evidence is found that insider trading intensity increases on the insider trading day closest to the
announcement day. The hypothesis that index returns for insider trading days and non-trading days
are the same cannot be rejected, which is consistent with insiders avoiding detection. For stocks sold
by insiders, returns are higher for insider trading days than for non-insider trading days. Hence,
insiders are selling on days when the market is up, which tends to hide their trading. But for stocks
bought by insiders, returns are significantly higher on insider trading days than on
non-insider-trading days, indicating that in this case insiders may attract unwanted attention.
Originality/value – The research may be useful to those attempting to detect insider trades.
Keywords Insider trading,Stock markets, Financial information
Paper type Research paper
1. Introduction
We believe that insiders are likely to trade strategically to avoid revealing their private
information other traders and also to avoid detection by exchange surveillance
departments and others continually monitor order flow to detect suspicious trading.
Avoiding detection requires some insight into what order execution strategies are likely
to be detected. Obviously, to be suspicious insider trading must be abnormal in some
way. Using data for actual insider trading cases prosecuted by the Securities and
Exchange Commission (SEC), we investigate hypotheses related to strategies that
insiders might use to avoid detection.
There is growing interest in measuring market quality and its aspects such as
insider trading. The London Financial Services Authority recently sponsored a study
to measure market cleanliness based on the ratio of company announcements to
statistically significant trading prior to the announcement.
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1359-0790.htm
Strategic illegal
insider trading
247
Journal of Financial Crime
Vol. 18 No. 3, 2011
pp. 247-253
qEmerald Group Publishing Limited
1359-0790
DOI 10.1108/13590791111147460
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