nach oben

Review of Quantitative Finance and Accounting

Erschienen in:

01.07.2014 | Original Research

Insider trading and firm-specific return volatility

verfasst von: Partha Gangopadhyay, Ken C. Yook, Yoon Shin

Erschienen in: Review of Quantitative Finance and Accounting | Ausgabe 1/2014

Einloggen

Aktivieren Sie unsere intelligente Suche, um passende Fachinhalte oder Patente zu finden.

search-config

KI-gestützte Suche

Aus

Abstract

Roll (J Financ 43:541–566, 1988) argues that firm-specific stock return volatility may result either from informed trading or from noise trading that is unrelated to information. In this paper we provide evidence that insider purchases are inversely related to the idiosyncratic volatility of stocks. We also find that stock idiosyncratic volatilities are generally inversely related to future 6- and 12-month returns. Our results are primarily driven by the timing of insider sales rather than insider purchases. The results are consistent with an information-based explanation of firm-specific return volatility.

Nächster Artikel The absorption effect of US Treasury auctions

Sie haben noch keine Lizenz? Dann Informieren Sie sich jetzt über unsere Produkte:

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

über 102.000 Bücher
über 537 Zeitschriften

aus folgenden Fachgebieten:

Automobil + Motoren
Bauwesen + Immobilien
Business IT + Informatik
Elektrotechnik + Elektronik
Energie + Nachhaltigkeit
Finance + Banking
Management + Führung
Marketing + Vertrieb
Maschinenbau + Werkstoffe
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

Jetzt informieren

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

über 67.000 Bücher
über 340 Zeitschriften

aus folgenden Fachgebieten:

Bauwesen + Immobilien
Business IT + Informatik
Finance + Banking
Management + Führung
Marketing + Vertrieb
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

Jetzt informieren

See Fama and French (1988), Poterba and Summers (1988), and Kim et al. (1991).

Theoretical and empirical work by Glosten and Milgrom (1985), French and Roll (1986), and Ross (1989) also establish linkages between informed trading and return volatility.

Jiang et al. (2009) find that IVOL is inversely related to future returns, and that this inverse relationship is induced by an inverse relationship between IVOL and future earnings.

In a recent paper, Marin and Olivier (2008) provide theoretical and empirical evidence to validate the idea that insider sales are motivated by information. Firth et al. (2011) examine stocks listed on the Hong Kong Exchange and find that insider sales are more informative than insider purchases.

Most of the trades were reported on form 4.

Roll (1988) uses R²s from market model regressions and multi-factor regressions to distinguish between firm-specific return variation from systematic variation. For the market model, it is easy to show that \( {\text{IVOL}}_{\text{i}} = \left[ {\left( {{\text{N}} - 1/{\text{N}} - 2} \right)} \right]\left[ {{\text{var}}\left( {{\text{r}}_{\text{i}} } \right)\left( { 1- {\text{R}}^{ 2}_{\text{i}} } \right)} \right] \), where N is the time-series sample size for stock i, var(r_i) is the sample variance of r_i, and R _i ² is the market model regression R² for stock i.

Each firm is counted once in a given six-monthly period. The same firm can appear in the sample in other six-monthly periods. For example, if insider trading data and IVOL for a given firm are available in all 30 six-monthly periods between 1994 and 2008, then we have 30 firm-half-years of observations.

These are close to the average purchase ratios that have been reported in other studies. Rozeff and Zaman (1998) report an average PR ratio of 46.5 %. Piotroski and Roulstone (2005) report mean and median PR ratios of 40 and 13.7 % respectively.

Ferreira and Laux (2007) report an average annualized IVOL of 44 percent between 1990 and 2001. Jiang et al. (2009) report mean and median IVOL numbers over different time periods. For the most recent time period in their study (2000–2002), the mean and median daily IVOLs are 2.87 and 2.53 % respectively. These are very close to the numbers that are reported in Table 1.

As we discussed in the introductory section, the insider trading literature is ambivalent on the question of whether insider trading profits arise purely from contrarian trading, or whether trading profits also reflect the utilization of useful private information. The goal of this paper is to examine the information content of insider trades by linking insider trades to firm IVOLs. Since insiders are known to be contrarian traders, we need to control for contrarian trading in order to examine the incremental relationship between insider trades and IVOLs.

Gider and Westheide (2011) argue that insiders take advantage of their superior information by purchasing stocks that have high IVOL. They assume that IVOL is positively correlated with the level of information asymmetry in a stock, even though they admit that “there is no consensus in the literature as to whether a high or a low level of idiosyncratic volatility indicates large information asymmetries” [p. 6].

Piotroski and Roulstone (2004) do not test this hypothesis in their paper.

Also, see Ang et al. (2006), and Ferreira and Laux (2007).

Rtf₆ and RTf₁₂ are raw future six- and twelve-monthly returns. Ang et al. (2006) sort stocks into IVOL quintiles and report an average monthly difference of 1.06 percent in the raw returns between stocks in the bottom IVOL quintile and the top quintile. Jiang et al. (2009) report a quarterly differential of 3.28 percent for stocks in the bottom IVOL decile portfolio and the top IVOL decile portfolio.

However, the coefficients of PR are small in Table 4. For the twelve-month horizon the coefficients for small, medium, and big firms are 6, 0.6, and 3 % respectively. Lakonishok and Lee (2001) report that insider trades are marginally profitable for small firms after controlling for contrarian trading, but are not profitable for other firms.

This idea comes from Piotroski and Roulstone (2004), who argue that insider sales transactions that are motivated by the need for liquidity are positively related to IVOL because insiders diversify their holdings in response to high IVOL. As we mentioned earlier, Piotroski and Roulstone (2004) do not test this hypothesis in their paper. It is possible that the bulk of the insider trades in our sample of small firms are motivated by the demand for liquidity.

In a more recent paper, Marin and Olivier (2008) examine insider trading patterns before large movements in stock prices. Marin and Olivier (2008) provide compelling theoretical and empirical evidence that “invalidate the mainstream view that insider sales are solely driven by liquidity needs” [p. 2444].

PR and PRN are bounded between 0 and 1 by construction. Following Piotroski and Roulstone [2004, Eq. (2)], we take log transformations of PR and PRN to create “unbounded continuous” dependent variables that are more normally distributed, and replicate the results in Tables 2 and 3. Our conclusions and inferences do not change as a result of using the log transformations of PR and PRN as dependent variables in regressions (4) and (5).

Ang A, Hodrick RJ, Xing Y, Zhang X (2006) The cross-section of volatility and expected returns. J Financ 61:259–299CrossRef

Ang A, Hodrick RJ, Xing Y, Zhang X (2009) High idiosyncratic volatility and low returns: international and further U.S. evidence. J Financ Econ 91:1–23CrossRef

Bali TG, Cakici N (2008) Idiosyncratic volatility and the cross-section of expected returns. J Financ Quant Anal 43:29–58CrossRef

Bhagat S, Marr W, Thompson R (1985) The rule 415 experiment: equity markets. J Financ 40:1385–1401CrossRef

Blackwell D, Marr W, Spivey M (1990) Shelf registration and the reduced due diligence argument: implications of the underwriter certification and the implicit insurance hypothesis. J Financ Quant Anal 25:245–259CrossRef

Campbell JY, Vuolteenaho T (2004) Bad beta, good beta. Am Econ Rev 94:1249–1275CrossRef

Carlton D, Fischel D (1983) The regulation of insider trading. Stanford Law Rev 35:857–895CrossRef

Clarke J, Dunbar C, Kahle KM (2001) Long-run performance and insider trading in completed and canceled seasoned equity offerings. J Financ Quant Anal 36:415–430CrossRef

Dierkens N (1991) Information asymmetry and equity issues. J Financ Quant Anal 26:181–199CrossRef

Durnev A, Morck R, Yeung B, Zarowin P (2003) Does greater firm-specific return variation mean more or less informed stock pricing? J Acc Res 41:797–836CrossRef

Durnev A, Morck R, Yeung B (2004) Value-enhancing capital budgeting and firm- specific stock return variation. J Financ 59:65–105CrossRef

Fama EF, French KR (1988) Permanent and temporary components of stock prices. J Polit Econ 96:246–273CrossRef

Fama EF, French KR (1993) Common risk factors in the returns on stocks and bonds. J Financ Econ 33:3–56CrossRef

Fama EF, French KR (1996) Multifactor explanations of asset pricing anomalies. J Financ 51:131–155

Ferreira MA, Laux PA (2007) Corporate governance, idiosyncratic risk, and information flow. J Financ 62:951–989CrossRef

Fidrmuc JP, Goergen M, Renneboog L (2006) Insider trading, news releases, and ownership concentration. J Financ 61:2931–2974CrossRef

Firth M, Leung TY, Rui OM (2011) Insider trading in Hong Kong: tests of stock returns and trading frequency. Rev Pac Basin Financ Mark Polit 14:505–533CrossRef

French KR, Roll R (1986) The arrival of information and the reaction of traders. J Financ Econ 13:547–559CrossRef

Gider J, Westheide C (2011) Idiosyncratic volatility and the timing of corporate insider trading. Working Paper, University of Mannheim

Givoly D, Palmon D (1985) Insider trading and the exploitation of inside information: some empirical evidence. J Bus 58:69–87CrossRef

Glosten L, Milgrom P (1985) Bid, ask, and transaction prices in a specialist market with heterogeneously informed traders. J Financ Econ 14:71–100CrossRef

Jaffe JF (1974) Special information and insider trading. J Bus 47:410–428CrossRef

Jegadeesh N, Titman S (1993) Returns to buying winners and selling losers: implications for stocks market efficiency. J Financ 48:65–91CrossRef

Jenter D (2005) Market timing and managerial portfolio decisions. J Financ 60:1903–1949CrossRef

Jiang GJ, Xu D, Yao T (2009) The information content of idiosyncratic volatility. J Financ Quant Anal 44:1–29CrossRef

Jin L, Myers S (2006) R² around the world: new theory and new tests. J Finac Econ 79:257–292CrossRef

Ke B, Huddart S, Petroni K (2003) What insiders know about future earnings and how they use it: evidence from insider trades. J Acc Econ 35:315–346CrossRef

Kim M, Nelson CR, Startz R (1991) Mean reversion in stock prices? A reappraisal of the empirical evidence. Rev Econ Stud 58:515–528CrossRef

Krishnaswami S, Subramaniam V (1999) Information asymmetry, valuation, and the corporate spin-off decision. J Financ Econ 53:73–112CrossRef

Kryzanowski L, Lazrak S (2011) Informed traders of cross-listed shares trade more in the domestic market around earnings releases. Rev Quant Financ Acc 36:1–31CrossRef

Lakonishok J, Lee I (2001) Are insider trades informative? Rev Financ Stud 14:79–111CrossRef

Lakonishok J, Shleifer A, Vishny RW (1994) Contrarian investment, extrapolation, and risk. J Financ 49:1541–1578CrossRef

Lin J, Howe J (1990) Insider trading in the OTC market. J Financ 45:1273–1284CrossRef

Manne HG (1966) In defense of insider trading. Harv Bus Rev 44:113–122

Marin JM, Olivier JP (2008) The dog that did not bark: insider trading and crashes. J Financ 63:2429–2476CrossRef

Morck R, Yeung B, Yu W (2000) The information content of stock markets: why do emerging markets have synchronous stock price movements? J Financ Econ 59:215–260CrossRef

Pascutti MJ (1996) Inside trading, market regimes, and information. Working Paper, Harvard University

Pettit RR, Venkatesh PC (1995) Insider trading and long-run return performance. Financ Manag 24:88–103CrossRef

Piotroski JD, Roulstone DT (2004) The influence of analysts, institutional investors, and insiders on the incorporation of market, industry, and firm-specific information into stock prices. Acc Rev 79:1119–1151CrossRef

Piotroski JD, Roulstone DT (2005) Do insider trades reflect both contrarian beliefs and superior knowledge about future cash flow realizations? J Acc Econ 39:55–81CrossRef

Poterba JA, Summers LM (1988) Mean reversion in stock prices: evidence and implications. J Financ Econ 22:27–59CrossRef

Roll R (1988) R². J Financ 43:541–566

Ross S (1989) Information and volatility: the no-arbitrage martingale approach to timing and resolution irrelevancy. J Financ 44:1–17CrossRef

Rozeff MS, Zaman MA (1998) Overreaction and insider trading: evidence from growth and value portfolios. J Financ 53:701–716CrossRef

Seyhun N (1986) Insiders’ profits, costs of trading, and market efficiency. J Financ Econ 16:189–212CrossRef

Seyhun N (1990) Overreaction or fundamentals: some lessons from insiders’ response to the market crash of 1987. J Financ 45:1363–1388CrossRef

Seyhun N (1992) Why does aggregate insider trading predict future stock returns? Q J Econ 107:1303–1331CrossRef

Wurgler J (2000) Financial markets and the allocation of capital. J Financ Econ 58:187–214CrossRef

Titel: Insider trading and firm-specific return volatility
verfasst von: Partha Gangopadhyay
Ken C. Yook
Yoon Shin
Publikationsdatum: 01.07.2014
Verlag: Springer US
Erschienen in: Review of Quantitative Finance and Accounting / Ausgabe 1/2014
Print ISSN: 0924-865X
Elektronische ISSN: 1573-7179
DOI: https://doi.org/10.1007/s11156-013-0362-z

Springer Professional

Abstract

Bitte loggen Sie sich ein, um Zugang zu Ihrer Lizenz zu erhalten.

Sie haben noch keine Lizenz? Dann Informieren Sie sich jetzt über unsere Produkte:

Springer Professional "Wirtschaft+Technik"

Springer Professional "Wirtschaft"

Weitere Artikel der Ausgabe 1/2014

An investigation of recent changes in going concern reporting decisions among Big N and non-Big N auditors

Investors’ perception of corporate governance: a spillover effect of Taiwan corporate scandals

The information content of disaggregated accounting profitability: operating activities versus financing activities

Why managers with low forecast precision select high disclosure intensity: an equilibrium analysis

Venture capitalists and portfolio companies’ real activities manipulation

The absorption effect of US Treasury auctions