Information Content of Insider Trading Volume: Evidence from Sri Lanka

Abstract

This study examines whether high volume directors' trading is more informative than low volume directors' trading. It further examines the speed of adjustment of stock prices for the information content of high volume directors' trading of the listed companies in the Colombo Stock Exchange (CSE). This study analyses a sample of high rupee-volume and percentage-volume directors' purchases and sales reported to the CSE during September, 2004 to August, 2012 using the standard event study methodology. The findings on the high rupee-volume trading are consistent with the hypotheses that high rupee-volume directors' purchases (sales) are associated with positive (negative) abnormal returns. Although the abnormal returns of percentage-volume directors' sales are negative and significant, the high percentage-volume directors' purchases are not significant. The findings on the speed of adjustment of stock prices on these information are not conclusive. I.e., the abnormal returns of high rupee-volume directors' purchases are positive and significant on the event day and the abnormal returns of high rupee-volume and percentage-volume director's sales are negative and significant but have been reflected in the stock prices with a delay suggesting that the adjustment of stock prices for director's sales may not be quick in the CSE.

Directors’ stock-purchases on stock performance: Evidence from Colombo Stock Exchange

“…Berkman et al (2016) suggest that director stock tradings are incorporated into stock prices with a delay in Australia, due to regulatory involvements. In Sri Lanka, Perera and Nimal (2014) reveal that trading volume and trading percentage of director stock-purchase transactions are rapidly reflected in stock prices. Conversely, after three years of their study, no conclusive evidence on stock market efficiency in CSE is observed (Perera & Nimal, 2017).…”

“…In Sri Lanka, Perera and Nimal (2014) reveal that trading volume and trading percentage of director stock-purchase transactions are rapidly reflected in stock prices. Conversely, after three years of their study, no conclusive evidence on stock market efficiency in CSE is observed (Perera & Nimal, 2017).…”

“…However, the consequences of such purchases being in par with the predicted outcomes and whether it would reflect stock prices more efficiently are problematic. Contradictory evidence is found on the performance of stock-purchase transactions of directors in many countries (Hossain, Heaney & Yu, 2018;Perera & Nimal, 2014;Perera & Nimal, 2017;Lee & Bishara, 1989;Lakonishok & Lee, 1998;Brown & Foo, 1997, as cited in Hossain et al, 2018Brown, Foo & Watson, 2003;Antoniadis, Gkasis & Sormaset, 2015;Berkman, Bradrania, Prodromu & Westerholm., 2016) as well as for stock price efficiency (Perera & Nimal, 2014;Perera & Nimal, 2017;Lakonishok & Lee, 2001;Berkman et al, 2016;Bajo & Petracci (2006), as cited in Dardas & Guttler, 2011;Bajo, 2010;Jaffe, 1974;Betzer & Theissen, 2008;Fidrmuc, Goergen & Renneboog, 2006). Hence, this study provides a certain value addition to the existing literature by bridging this gap.…”

“…Reflecting the above, numerous empirical studies in the United States (US), United Kingdom (UK), and other European countries suggest that information asymmetry between directors and outside investors enables directors to outperform other investors when trading in their company stocks (Baty, 2008)( ). Such studies have been widely carried out in both developed and emerging markets, but works on frontier markets, such as Sri Lanka, are limited (Perera & Nimal, 2017)( ). Moreover, the brokerage community reveals a lack of comprehensive studies conducted on directors' stock tradings in Sri Lanka (Shauketaly, 2012).…”

How cost of capital is changing: The effect of accounting information

“…Firms with little available information may experience higher costs of capital. The impact of information in influencing the costs of capital are indicated by several studies (Botosan, 1997; Christensen, de la Rosa, & Feltham, 2010; Easley & O'hara, 2004; Feltham, Robb, & Zhang, 2007; Huang & Kang, 2018; Hughes, Liu, & Liu, 2007; Lambert, Leuz, & Verrecchia, 2012; Perera & Nimal, 2017). For instance, the rational expectations model explains the relationship between private information and the costs of capital.…”