TILEC-AFM Chair on Financial Market Regulation

Very preliminary and incomplete – Not for distribution In this paper, we employ a registry of legal insider trading for Dutch listed firms to investigate short-term stock market reactions around legal insider trades. Regulations stipulate that insiders are not allowed to trade shares of their own company based on private and price-sensitive information. It has been shown nevertheless that insiders have superior knowledge either on the future prospects of their firm or on the mispricing of the stock by the market. Using standard event study methodology, we examine stock price behavior be-fore and after insider trading to analyze the information content of the trades. The main findings are: (1) trading by insiders indeed provides new information to the market; (2) trades made by top executives of a company carry more information than those made by other insiders; (3) trades following exercises of employee stock options seem to be motivated more by liquidity needs than superior information; (4) insiders choose the right timing to carry on their trans-actions. We further test for the cross-sectional determinants of the cumulative abnormal returns before and after insider trades, and investigate how recent regulatory changes about the speed of notification and releases of price-sensitive information affect stock market price reactions. 1