Are insider trades profitable? Evidence from directors' trade on the Australian Stock Exchange

This paper argues that directors earning statistically significantly abnormal returns from trades within their own companies. Evidence is provided through the analysis of 8,053 transactions by directors on the Australian Stock Exchange during the period of January 2002 to April 2006. Specifically this paper finds directors' sales to be more profitable than purchases, contrary to much of the existing US and UK research. Director sales exhibit a price reversal effect, in that positive abnormal returns are earned prior to the sale and negative returns after it. There is also evidence to support abnormal returns being associated with buy trades, however these returns are generally earned in the periods well after the transaction has taken place. Furthermore, the profits arising from director trades appear to be negatively related to transaction value and firm size; that is, those trades which are small in terms of dollar value, and are within small cap companies, generally generate larger abnormal returns.12 page(s