This thesis addresses two important issues necessary to understand whether insider trading should be prohibited: the effects of insider trading on stock prices and the compensation to insiders for providing information and other related services. This task is accomplished by analyzing stock price changes during corporate takeovers, before and after the regulatory changes in the 1980's that were designed to reduce the level of insider trading. In this thesis, we develop an indirect measure of insider trading that shows how observable stock price movements during takeovers allow one to make inferences about changes in insider trading after regulatory changes. Specifically, we show that when inside information is partially revealed to the market, the effects of regulatory changes on insider trading can be identified by examining the price movements of stocks around takeover announcements. If, however, information is not revealed at all or is fully revealed, it is impossible to identify the effects of regulatory changes on insider trading. We also develop a segmented diffusion model to analyze price movements characterized by cumulative abnormal returns during the period surrounding a takeover announcement. An econometric model is developed to estimate the segmented diffusion model. Naturally, this methodology applies to the study of various events in addition to corporate takeovers and regulatory changes. We conduct empirical analysis to test three hypotheses. With regard to Hypothesis I, we find strong evidence that the tightening of insider trading regulations in the 1980's was effective and that inside information was partially revealed to the market. With regard to Hypothesis II, we find evidence that insider trading regulations have more effect on negotiated takeovers than on takeovers initiated by bidding. With regard to Hypothesis III, we find weak evidence that insiders associated with acquiring firms seek fewer but more profitable takeovers after the introduction of tighter regulations. / Business, Sauder School of / Graduate

Stock options increasingly feature as part of CEO compensation, and there is evidence that CEOs of South African listed target companies engage in the practice of awarding themselves more options prior to takeover. This finding is consistent with CEO behaviour of foreign companies as explained by literature. After the recent financial crisis of 2008, there is a greater likelihood that financially stable companies might consider acquiring struggling companies with attractive potential future earnings. By gaining insight into the practices of stock option grants to CEOs, acquiring companies can ensure fair practice as well as not paying an undue premium for a target company. This study was conducted using a sample of 39 Johannesburg stock exchange (JSE) listed target companies, which were acquired during the period 2005- 2009. The focus was on the number of options awarded prior to the announcement date of the takeover in relation to subsequent options awarded. A median test, together with a Chi-squared test was used to evaluate the independence of option grants prior to acquisition and the actual acquisition transaction. Strong evidence was found that these two activities are not independent. Copyright / Dissertation (MBA)--University of Pretoria, 2010. / Gordon Institute of Business Science (GIBS) / unrestricted

Insider trading and earnings management (EM) have traditionally been associated with fraud and corporate scandals. Corporations involved in fraudulent financial reporting or earnings manipulations were assumed to have used insider trading patterns to manipulate earnings, thereby concealing information from investors. The purpose of this quantitative, non-experimental study was to examine the association between insider trading patterns and EM citations among a randomly selected sample of publicly traded companies. The research question pertained to the association between the number of EM citations and whether a firm exhibited patterns of insider trading among publicly traded firms. The theoretical framework was based on accounting, auditing and financial theories. Archival data were collected in the form of financial statements from annual reports of 77 companies submitted to the Securities and Exchange Commission. A multiple linear regression was used to answer the research question to determine whether there was an association between insider trading patterns and EM. Results of descriptive statistics and regression analysis revealed that, after controlling for the firm size, a significant association existed between the number of EM citations and patterns of insider trading in the sample of publicly traded firms. A positive relationship, wherein firms with patterns of insider trading had more EM citations as indicated from the regression results. These findings may encourage investors, regulators, auditors, the public, and other interested parties to work with researchers to foster confidence in financial markets and the accounting profession, and to redeem the mistakes made by companies in the past.

This study examines board meetings’ role in reducing the information gap between managers and independent directors. Using abnormal returns to insider trades as a proxy for insiders’ information level, I find no association between board meetings and the manager-director information gap for the pre-2003 period. However, in the post-2003 period, board meetings significantly increase directors’ information level relative to that of managers. I next identify that board meetings’ informational role is driven by the 2003 NASDAQ and NYSE board independence requirements. Further analyses support a causal link between board meetings and the smaller manager-director information gap post-2003. Furthermore, board meetings’ information role is more pronounced for directors who are relatively new to the firm, diverse directors, directors with outside connections, and directors sitting on certain committees. Lastly, using a subsample of firms that voluntarily disclose disaggregated information on board meetings, I find that the form of board meetings also matters: in-person board meetings reduce the manager-director information gap, while remote board meetings do not. Overall, board meetings’ informational efficacy depends on mandatory board independence, independent directors’ characteristics, and board meetings’ organizational forms.

In 1995 Congress passed the Private Securities Litigation Reform Act to address several perceived abuses in securities fraud class actions. In the aftermath of Enron, WorldCom, and other high profile securities litigation, critics suggest that the law made it easier for firms to escape securities fraud liability and thus created a climate conducive to fraud. Proponents maintain that the PSLRA has deterred the filing of nonmeritorious cases. This article explores whether the PSLRA achieved Congress's twin goals of "curb[ing] frivolous, lawyer-driven litigation, while preserving investors' ability to recover meritorious claims." The empirical evidence suggests that, in many respects, the PSLRA did achieve several of Congress' goals. There has been a reduction in the number of securities class actions filed. The PSLRA has improved overall case quality, particularly in the circuit with most stringent interpretation of the heightened pleading standard. In general, Congress seems to have achieved its goal of reducing the race to the court by increasing the filing delay in securities class actions. However, a stricter interpretation of the pleading standard does not affect this. The PSLRA does little to reduce the incidence of litigation for high technology issuers, but the evidence suggests that the litigation risk has substantially decreased for these issuers. Overall, the monitoring of attorney's effort increased, but institutional investors are no better at monitoring than other lead plaintiffs. The findings also suggest that lead plaintiffs forcing plaintiff's attorneys to compete for designation as lead counsel has resulted in lower attorney's fees. The observed effect is greater when the lead plaintiff is an institutional investor.

Yes / Purpose – The purpose of this paper is to investigate the impact of insider trading on subsequent stock returns in the UK, with a specific focus on the impact of the global financial crisis of 2007-2008 on the relation between CEO and CFO stock purchases and returns. Design/methodology/approach – The empirical analysis uses 10,230 purchases executed in 679 UK firms by 1,477 directors during the period from 2000 to 2010. Subsequent market-adjusted stock returns are regressed on a set of firm-specific accounting, market and corporate governance variables as well as the characteristics of CEOs and CFOs. Additionally, the analysis distinguishes between the opportunistic and routine trades. Findings – The findings reveal that the position of the trading director and the nature of their trades are important in determining the impact on returns of insider trades. In particular, CEO purchases are on the whole more informative than CFO purchases and opportunistic purchases. The trades in the post-crisis period have a greater impact on subsequent stock returns. Research limitations/implications – The empirical analysis is limited to the trades made by two executives. Future research should consider inside trades by all directors and distinguish between executive and non-executive directors. Also, a behavioral measure should be developed to test if the financial crisis affected the trading behavior of directors and whether directors use insider trading strategically to signal information to the market. Practical implications – The impact of directors’ dealings on stock returns is not homogeneous. Financial analysts and investors should pay more attention to different types of trades and the identity of trading director. Originality/value – This paper, to the authors’ knowledge, provides the first attempt that combines in the same framework the identity and personal attributes of trading executive directors, firm-level corporate governance features, the nature of purchase transactions and the trading period characteristics. Furthermore the empirical analysis is carried out during a period that also covers the recent global financial crisis period and its immediate aftermath.

Background: Corporate governance as a concept has become increasingly popular since its introduction in the 1990s, as the division and exercise of power is an important aspect of today’s corporate world. One of the most essential parts of corporate governance is how the company’s board is constructed. Insider traders have been proven to gain a return higher than what should be expected, called abnormal returns. Literature has recently discovered a connection between a company’s board structure and how big insider traders’ abnormal returns are.  Purpose: The purpose of this study is to investigate how different board structure measures affect the profitability of insider trading on the Swedish stock market post-Covid-19.  Method: The study follows an event study methodology, focusing on the insider traders’ abnormal profit during two event windows of 35 and 183 days. The abnormal returns of 92 selected firms were calculated by using the market model to gather the expected return based on previous stock prices, and then comparing that expected return with the actual return of the insider. Furthermore, the board structure measures were collected from Refinitiv Eikon database, where data for all companies were found. To find the relationship between the abnormal return and board structure measures, an FGLS regression was applied, which could then be used to conclusions.  Conclusion: The findings of the FGLS regression confirm the hypothesis that board structure measures do affect insiders’ abnormal returns. In the 35-day event window, a negative effect was found for board size and the percentage of independent board members in the company, while a positive effect was found for the amount of board member compensation. For the longer 183-day event window, the percentage of independent board members, CEO-Chairman duality and CEO compensation being linked to stock performance were all having a positive effect on the abnormal returns of insiders.

Whether insiders can use informational advantage when purchasing or selling their company stocks to generate cumulative abnormal returns (CAR) has shown different results in several markets. The Swedish market is yet to be extensively examined, and this thesis aims to understand how insiders in the OMXS30 companies perform when testing CAR and if there exists an information asymmetry. A predicted return is generated through the market model to calculate CAR, and the same index OMXS30 is combined with stock return data. We conducted an event study through Stata to match the transactions with a particular trading day to see how the insiders' transaction yielded CAR. We find that significant CAR exists for all insider groups for various event windows and find a difference in significant CAR for both genders and insider positions. The results were robust when we changed to a new market index as the independent variable in our regression analysis. The results align with previous literature, stating that insiders generated significant CAR from insider trading and differences between insider position and gender (Jeng et al. 2003; Jiang & Zaman, 2010; Lasfer & Ye, 2023). The findings can be used for regulatory purposes when investigating information asymmetry.

In the first essay we study whether and how personal off-the-job managerial indiscretions impact corporate insiders’ trading behavior. We find that executives accused of personal indiscretions earn significantly higher abnormal returns from their insider purchases and sales in a 15-day window around each trade. The results are robust to matched sample analyses. Further, insiders’ historical trading pattern or corporate culture has less explanatory power than personal attributes. We also document that exposure of these indiscretions to the public provides a disciplinary effect, as insider trading profits significantly drop following the announcement of an indiscretion, despite this drop being temporary. Corporate governance mechanisms, such as blackout policies, significantly reduce abnormal returns earned by indiscretion executives. In the second essay we find that individualistic countries regulate insider trading activities more intensely. The result is robust to controlling for alternative culture variables, additional controls, and instrumental variable analysis. We also document that individualism’s effect is magnified in democratic countries. In addition, we study the economic and financial consequences of individualism, insider trading regulation, and its enforcement. The analysis suggests that individualism and the enforcement of insider trading regulation promote financial development. Interaction effects reveal that individualism and insider trading regulation serve as complements to promote financial development. These findings contribute to the insider trading debate since regulation alone may not be the primary determinant of market efficiency. Combined, our results challenge prior works concluding that individualism is anti-regulation. In the last essay we explore the relation between insider trading regulation and the cost of equity in a country. Bhattacharya and Daouk (2002) conduct a comprehensive survey of 103 countries on whether insider trading law exists and has been enforced. They find that the enforcement of insider trading law, not the existence, can significantly reduce the cost of equity in a country. In this paper, we use an updated sample to reevaluate this topic and answer whether this relation still holds after adding 20 years of new data. Preliminary results show that countries with lighter insider trading regulation and countries that have enforced insider trading laws tend to experience lower cost of equity.

This paper examines the impact of reduced insider trading enforcement on the stock market using a unique and plausibly exogenous U.S. court ruling that undermines the SEC’s ability to prosecute insider trading defendants in court. Contrary to the conventional view, the study finds that the court ruling has positive effects on liquidity and stock price, consistent with the idea that stock prices become more informative when insider trading enforcement is reduced. The effects are less positive for firms with high ex-ante stock price informativeness, as the benefits of reduced insider trading enforcement are smaller for these firms. However, liquidity deteriorates in pre-earnings announcement periods after the court ruling, as investors anticipate forthcoming information and delay their trades until the announcement, due to heightened risks associated with trading against those with private information. In sum, this paper shows that the effect of reduced insider trading enforcement on liquidity and stock price could be positive overall. This study holds implications for the SEC, which aims to regulate insider trading for a fair market while also considering liquidity to maintain an efficient market.