The Reaction of Investors and Stock Prices to Insider Trading

The Ethics of Insider Trading Revisited

“…After examining some specific cases, Dooley (1980) finds that insider trading did not delay the public disclosure of information. The improved informational efficiency is empirically confirmed by Meulbroek (1992), Cornell and Sirri (1992), Chakravarty and McConnell (1997) and Aktas et al (2007). Carlton and Fischel (1983) point out that insider trading creates an additional method for communicating information.…”

“…The authors conclude that this is an example of 'regulatory overkill' because market liquidity decreased while the main objective was to increase liquidity by eliminating insiders trades. Examining a clinical case of insider trading Cornell and Sirri (1992) also report that insider trading did not reduce market liquidity, mainly because of the increase in uninformed trading volume. Chakravarty and McConnell (1997) come to the same conclusion: insider's trades did not decrease market liquidity.…”

Analyzing Insider Trading from the Perspectives of Utilitarian Ethics and Rights Theory

“…Trading on inside information causes information to be released into the marketplace sooner rather than later, thus causing stock prices to move in the right direction quicker than would otherwise be the case. Studies by Meulbroek (1992), Cornell and Surri (1992), and Chakravarty and McConnell (1997) support this position. Another argument in favor of insider trading is that inside information is property, and preventing individuals from trading their property violates their property rights.…”

Internal dealing regulation and insiders’ trades in the Italian financial market

“…The literature on the topic is limited: Lakonishok and Lee (1998) have shown that abnormal returns earned by insiders (raw return minus market return) are small in US (less than 0.5%); in the UK market, Friederich et al (2002) show that directors engage in short term market timing: they sell (buy) after an increase (decline) in prices and their trades are followed by a price reversal; abnormal returns are statistically significant over twenty days before trades. On evidence of abnormal returns and illegal insider trades, see Meulbroek (1992) and Cornell and Sirri (1992). Our analysis shows that corporate insiders time the market by exploiting short term market movements.…”