After-Hours Block Trading, Short Sales, And Information Leakage: Evidence From Korea

Abstract

We investigate the impact of insider trading in after-hours block market on stock price and short sales volume, before and after the trading becomes public information. During pre-announcement period, positive (negative) abnormal stock return is generated when insiders buy (sell) their shares but does not when quasi-insiders trade, implying that stock price reflects long-lived private information of corporate governance structure. The impact is most prominent when ownership shares are transferred to (from) corporate insiders. In contrast, short sales volume generally does not depend on the identity of block holders. Short sales volume has a negative correlation with abnormal stock return only during the transaction date, indicating that a short-sale decision of tippees is based on their sole expectation on instantaneous stock returns. We also find evidence that insiders select the timing of their trades with respect to maximizing their realized profits or minimizing their purchasing costs.

Effect of pre-disclosure information leakage by block traders

“…In prior literature related to off-hours block trading, Khil et al (2005) provided indirect evidence of information leakage using the closing price on the trading day. Moreover, Lee and Jun (2017) concluded that pre-disclosure information was leaked by insiders. This study investigated information leakage by block traders acting as agents for activating stock trades.…”

“…Khil et al (2005) suggested that the closing price of the stock on the block trading day reflected private information regarding the impending trade to which Pre-disclosure information leakage block traders had access. In addition, Lee and Jun (2017) found that off-hours block trading executed by insiders was related to a leakage of information prior to public disclosures. Brunnermeier (2005) found that early-informed investors could exploit pre-disclosure private information twice: once before the disclosure and once after the disclosure.…”

“…Therefore, off-hours block trading is vulnerable to information leakage from block traders, as well as firms' insiders, prior to disclosures. Lee and Jun (2017) found that information was leaked prior to the disclosure of firms' insider purchases or sales in the off-hours block market. Meanwhile, off-market trading is only vulnerable to firms' insiders due to the nature of the disposal method.…”