Insiders as forecasters : A study on how information value from insider trading can affect the presence of asymmetric information

Abstract Authors: Eric Andersson and Mattias Lundgren Advisor: Christopher von Koch Examiner: Håkan Locking Institution: School of Business and Economics at Linnaeus University, 2017. Title: Insiders as forecasters - A study on how information value from insider trading can affect the presence of asymmetric information. Introduction: Previous studies concerning insider trading have confirmed that insiders generate an abnormal return and that insider trading creates a market reaction. A market reaction after insider trading indicates that private information becomes public, but it can also be interpreted as a measurement of asymmetric information. Analysts has an important role in order to reduce the amount of asymmetric information. This study investigates whether there is a relationship between insider trading and future short-term profitability. This study also investigates whether there is a relationship between insider trading and revision of analysts short-term profitability forecasts. Purpose: This study aims to investigate the information value in insider trading and how information about insider transactions can be used by analysts to reduce the amount of asymmetric information. Method: Our study takes a deductive research approach where the methodology is one of a quantitative and explanatory character. The theoretical foundation is based on the effective market hypothesis (EMH) and agency theory. We examines 29 429 observations of insider trading during a ten-year period between 2007-01-01 and 2016-12-31, in order to analyze the short-term information value provided by insider transaction. Conclusions: The results of our study confirm that there is a positive relationship between insider purchases and future short-term profitability. However, a relationship between insider sales and future short-term profitability can not be confirmed. This result indicates that insider purchases add an information value to the market. Nevertheless, no relationship between insider trading and revision of analysts short term profitability forecast can be confirmed.