Insider Trading and the Bid‐Ask Spread

Abstract

This study examines the intertemporal and cross-sectional association between the bidask spread and insider trading. Empirical results from the cross-sectional regression analysis reveal that market makers establish larger spreads for stocks with a greater extent of insider trading. The time-series regression analysis, however, finds no evidence of spread changes on insider trading days. These results suggest that although market makers may not be able to detect insider trading when it occurs, they protect themselves by maintaining larger spreads for stocks with a greater tendency of insider trading. The results also reveal that market makers establish larger spreads when there are unusually large transactions. In addition, this study finds that spreads are positively associated with risk and negatively with trading volume, the number of exchange listings, share price, and firm size.

Foreign Ownership and Information Asymmetry

“…Since insider holdings are perceived to have potential for adverse selection, insider ownership could drive up bid-ask spreads (e.g. Chiang and Venkatesh, 1988;Chung and Charoenwong, 1998). Although insiders, including managers, board members and private owners, may retain a larger portion of shares to signal their confidence about the firm's prospects (Su, 2004), in China managers are usually selected from government officers and the extent of managerial ownership in China is limited.…”

Legal Insider Trading and Stock Market Liquidity

“…Researchers typically use shorter estimation and event windows compared to the traditional event study methodology. Chung and Charoenwong (1998) use as event period a window of five days before and after the event date, and as benchmark period 15 days before and after the estimation period. Garfinkel and Nimalendran (2003) also perform a short-term event study with microstructure measures.…”

“…The existing papers use a cross-sectional approach to compare the impact of insider trading on spreads across firms. Chung and Charoenwong (1998) study the bid-ask spread of US stocks and relate it to legal insider trading. They find that in average, firms with larger extent of legal insider trading have larger spreads, but contrary to our results, they do not find evidence that spreads increase in the period around legal insider trading.…”

The Determinants of CDS Bid-Ask Spreads

“…Our approach is similar to several empirical papers analyzing equity bid-ask spreads and earnings announcements that directly regress bid-ask spreads on proxies associated with different components of the bid-ask spreads, for example, Venkatesh and Chiang (1986) and Chung and Charoenwong (1998). Venkatesh and Chiang (1986) examine under what conditions market makers in equity markets widen bid-ask spreads preceding earnings and dividend announcements, while Chung and Charoenwong (1998) show that bid-ask spreads are higher for stocks with greater tendency for insider trading.…”

“…Venkatesh and Chiang (1986) examine under what conditions market makers in equity markets widen bid-ask spreads preceding earnings and dividend announcements, while Chung and Charoenwong (1998) show that bid-ask spreads are higher for stocks with greater tendency for insider trading.…”