The Impact Of Insider Trading On Market Liquidity In The NASDAQ Market

Abstract

<p class="MsoBlockText" style="margin: 0in 0.6in 0pt 0.5in; mso-pagination: none;"><span style="font-style: normal; font-size: 10pt; mso-bidi-font-style: italic;"><span style="font-family: Times New Roman;">This study examines the relationship between insider trading and market liquidity (spread and depth) of NASDAQ-100 stocks.<span style="mso-spacerun: yes;">  </span>Tests on an intraday sample of sell trades show no evidence of cross-sectional association between the width of the spread and insider trading, but detect some widening of the spread after the fact.<span style="mso-spacerun: yes;">  </span>Overall, our results provide mixed evidence on the ability of NASDAQ dealers to unravel informed order flow and adjust spreads accordingly. <span style="mso-spacerun: yes;"> </span>Their short-term behavior suggests an inability to detect insider trading and widen spreads, but their behavior over time suggests that dealers may attempt to recover what they apparently lose at a given point and time. </span></span></p>

Does director trading change the information environment?

“…Piotroski and Roulstone (2004) find an inverse relationship because these trades contain firm specific information. Khan et al (2011) find no change in spread with insider sales for NASDAQ-100 stocks. However, there are liquidity increases with active informed trading (Cornell and Sirri, 1992), whereas there is an increase in effective spread during permitted insider trading periods (Bettis et al, 2000).…”

An Investigation Of The Relation Between Corporate Governance And Liquidity: Empirical Evidence From France

“…Moreover, equities firms with weak market capitalization are less liquid (Chiang & Venkatesh, 1988;Laux, 1993). Smaller firms' stocks may exhibit greater spreads due to their low liquidity (Khan et al, 2005). Consequently, we anticipate a positive association between firm size and bid-ask spreads.…”

Legal Insider Trading and Stock Market Liquidity

“…See text for details about data and methodology of bid-ask spread. Also, Khan et al (2005) finds that for the largest 100 NASDAQ stocks, the bid-ask spread widens with delay to insider sales, and the authors interpret this results as dealers trying to recover their loss over time after insider trading. A similar interpretation can be made for our results.…”

“…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. Khan et al (2005) study the impact of insider trading on market liquidity in the NASDAQ market. They obtain mixed results and provide the interpretation that dealers are unable to detect informed investors on the market.…”