Although researchers have documented gains from insider trading, the sources of private information leading to information asymmetry and insider gains have not been comprehensively investigated. We focus on research and development (R&D)—an increasingly important yet poorly disclosed productive input—as a potential source of insider gains. Our findings, for the period from 1985 to 1997 indicate that insider gains in R&D-intensive firms are substantially larger than insider gains in firms without R&D. Insiders also take advantage of information on planned changes in R&D budgets. R&D is thus a major contributor to information asymmetry and insider gains, raising issues concerning management compensation, incentives, and disclosure policies.

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Information Asymmetry, R&D, and Insider Gains

https://deepblue.lib.umich.edu/bitstream/handle/2027.42/26147/0000224.pdf

Insiders' profits, costs of trading, and market efficiency

Whether insider trading affects stock prices is central to both the current debate over whether insider trading is harmful or pervasive, and to the broader public policy issue of how best to regulate securities markets. Using previously unexplored data on illegal insider trading from the Securities and Exchange Commission, this paper finds that the stock market detects the possibility of informed trading and impounds this information into the stock price. Specifically, the abnormal return on an insider trading day averages 3%, and almost half of the pre-announcement stock price run-up observed before takeovers occurs on insider trading days. Both the amount traded by the insider and additional trade-specific characteristics lead to the market's recognition of the informed trading.

An Empirical Analysis of Illegal Insider Trading

THE positive analysis of government regulation-measuring the actual rather than the intended effects of regulation-is an increasingly popular topic of research. Often this analysis concentrates on the \"wealth effects\" of regulation. At one extreme the \"public-interest\" or consumer-protection hypothesis predicts that regulation confers net benefits on consumers at the expense of regulated firms. At another extreme the \"capture\" or producer-protection hypothesis predicts that regulated firms receive net benefits at the expense of consumers. Yet another possibility is that regulators themselves receive net benefits at the expense of both consumers and regulated firms. All of these hypotheses make predictions about the effects of regulation on the value of the regulated firm.' Nevertheless, very little of the empirical research on regulation incorporates the methodology which has been developed in finance to study the behavior of security values. The efficient-markets/rational-expectations hypothesis2 posits that security prices reflect all available information. Hence, unanticipated changes in regulation result in a current change in security prices, and the

Using Financial Data to Measure Effects of Regulation

THE STRONG-FORM of the efficient market hypothesis assumes all available public and private information is fully relected in a security's market price. The strongform, in terms of market participants, also assumes that no individual can have higher expected trading profits than others because of monopolistic access to information. One possible test of the strong-form is to determine whether insiders earn better than average profits from their market transactions. To ascertain if the market is truly efficient will involve determining how well insiders do relative to the market in general. To date, some work has already been done in evaluating rates of return earned by insiders trading for their own accounts. Jaffe [3,4], Pratt and DeVere [8], Rogoff [9], and Glass [2] have calculated rates of return earned by insiders trading for their own accounts and their work lends some support to the hypothesis that insiders do, in fact, earn above average profits. A major shortcoming of these studies centers on data availability, as no precise price per share or date of insider trades were reported to the S.E.C. prior to 1965. Further, except for Jaffe, the studies do not incorporate an explicit adjustment for risk. An additional problem with all of the studies is the skimming of the cream of the crop in their sample selection. That is the selection of samples based on "intensive" insider trading criteria, i.e., the samples are biased in favor of whose performance would more than likely be superior to the average insider. This bias, while not affecting their results relative to the semi-strong-form, invalidates the findings for a test of the strong-form. By testing the entire population of insiders, this study evaluates the performance of the "average" insider. Section II presents an explanation of the methodology used to evaluate insider performance, while Section III list and evaluates the results. The final section presents implications and conclusions.

/pdf/insiders-and-market-efficiency-27ye539t8u.pdf

Insiders and market efficiency

CI NSIDERS" are officers, directors, and owners of ten per cent or more of the common stock of the companies listed on the New York and American Stock Exchanges. The Securities and Exchange Commission (the SEC) requires that insiders keep the Commission informed regarding transactions in the common stock and convertible securities of the respective companies. The interest of the SEC in trading by insiders stems in part from the belief that insiders should not exploit their special opportunities to know about developments in their companies for personal profit through short-term trading. Further, the Commission feels that information on trading by insiders should be fully disclosed to the investing public because of light which such trading might cast upon the company's future prospects. There is also wide-spread interest in the investment community in trading by insiders because of the prevalent belief that insiders have valuable private information which bears upon their company's prospects and that knowledge of the trading by insiders will permit valid inferences regarding future movements in the prices of stocks. Because of the interest by the SEC and the investment community in insider trading, we have undertaken this study. The subject has been studied before in many ways, but none of the preceding studies has been definitive and the additional methods of analysis seemed promising. Opinions are somewhat polarized. Academic studies have found virtually no evidence of profitable exploitation by insiders of their special knowledge and no value to outsiders in data on trading by insiders. Others believe that insiders often make extraordinary profits and that knowledge of their trading is valuable. Both the SEC and investors should be interested in which opinion is correct. The methods and coverage of this study differ from those of earlier work, as do our conclusions. We show that proper and prompt analysis of data on insider trading can be profitable, although almost all earlier academic work has reached the contrary conclusion. The first

/pdf/predictive-and-statistical-properties-of-insider-trading-3qdw0l5mtx.pdf

Predictive and Statistical Properties of Insider Trading

THE United States has been undergoing in recent years its third large merger movement. This last movement, beginning perhaps in the mid 1950's, is larger in number of firms and in assets than the earlier movements at the turn of the century and in the 1920's. Further, the absolute rate of merger activity is increasing. In 1968, 2,442 firms were acquired as compared with about 1,500 in 1967, about 1,000 in both 1965 and 1966, and substantially smaller numbers in earlier years. Although merger activity declined sharply in the third quarter of 1969, the rate for the first nine months of 1969 was above the comparable period for 1968. The rate of increase in the amount of assets of the acquired companies has also been substantial. In 1968 such assets amounted to 12.6 billion dollars as compared to about 8.2 billion in 1967, about half of that in the preceding two years, and substantially smaller sums prior to 1965.1 Since the numbers relating to mergers seem large and are increasing, there are signs of concern in Washington. The concern has been focused on conglomerate mergers which have been of increasing relative importance in this merger movement. It is believed that conglomeration has the following harmful effects:

James H. Lorie

Papers

Predictive and Statistical Properties of Insider Trading

Conglomerates: The Rhetoric and the Evidence