Abstract
PurposeThis paper investigates if investors consider legal insider trading data while making investment decisions. If any investment decision is based on insider transactions, then it will result in abnormal stock characteristics. The purpose of this paper is to investigate if insider trading affects stock characteristics like price, return and volume. The paper further investigates the effect on stock characteristics after the trade of different types of insiders and the relationship between abnormal return and abnormal volume.Design/methodology/approachThe study uses the event study method to measure the abnormal price, return and volume. Two-stage least square regression is used to investigate the relationship between abnormal return and abnormal volume.FindingsThe insider trades affect price, return and volume. The results are identical for both buy and sell transactions. The trades of different types of insiders have diverse effects on stock characteristics. The trades of substantial shareholders give rise to the highest abnormal price and return, whereas the promoters' trades result in the highest abnormal volume. No relationship is detected between abnormal return and volume.Originality/valueA novel method to calculate the abnormal price is proposed. The effect of trading of all types of insiders on stock characteristics is analyzed. The relationship between abnormal return and abnormal volume, after an insider trade, is investigated.
Highlights
The legality of an insider trade depends on the information it is based
Review of literature This study investigates the effect of insider trading on the stock markets by assessing its impact on stock characteristics like price, return and volume
It can be inferred from the results that insider trades affect stock characteristics like price, return and volume
Summary
The legality of an insider trade depends on the information it is based. It is legal if it is based on public information. Most investors believe that insiders’ transactions are based on non-public information, and mimicking these transactions can help them earn a better return (Tavakoli et al, 2012; Lei et al, 2014) Largescale mimicking of these transactions should result in a deviation of the actual values of stock characteristics (price, return and volume) from their expected values. If such a deviation is detected, it can be inferred that investors are mimicking insiders and that they believe insiders’ transactions are based on non-public information
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