UK Directors' Trading: The Impact of Dealings in Smaller Firms

Abstract

This paper reassesses the UK results of significant abnormal returns from directors' trading for a new sample of directors ' trades 1984-1986, and finds that abnormal returns tend to be concentrated in smaller firms. When an appropriate benchmark portfolio is used, it is found that the significance of the abnormal returns is substantially reduced, with the implication that directors' trading does not yield particularly high profits to either the directors themselves or to an outside investor mimicking those trades. 4 I IntroductionRecent studies by King and Röell (1988) and Pope, Morris and Peel (1990) have presented evidence, based on UK share price data, of the returns realised on securities following notification of a director's share dealing. These follow a sequence of studies 1 based on US data, which have examined the impact of `insider dealing' on share prices. Attention has focused particularly on whether non-insiders, observing only a notification of an insider trade, can still generate a positive abnormal return. In this paper we follow Seyhun (1986) and see whether these abnormal returns are related to firm size. We then attempt to discover whether the reported excess returns earned from following directors' trades can be explained by the size effect, under which small firms perform differently from their larger counterparts [Fama and French (1992)].In the next section we review details of the definition of directors' dealing, and Section III then summarises the findings of previous work in this area. Section IV describes the dataset used in this study, which is taken from the Stock Exchange reports of directors' trading in their own

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