Abstract
While the occurrence of insider profits from directors’ dealings has been discovered for international stock markets, the industry effects of executives’ transactions have been scarcely part of previous research. Since on a firm-specific level, there are indications for a positive relation between companies’ investments in research and development (R&D investments) and abnormal returns, this paper examines whether these results also hold on an industry level. We elaborate and apply an event study for all companies listed in the HDAX at the German stock market between January 2013 and August 2018, firstly on an overall level and secondly on an industry level within the HDAX. Additionally, we analyze the switch in the regulatory framework from national to EU legislation (WpHG to MAR) in 2016 and the potential consequences for directors’ dealings and stock market reactions. Our analysis shows that insiders in general act as contrarian investors. However, our analysis of directors’ dealings related to potential industry effects does not lead to significant abnormal returns. The shift in insider trading regulation from German to European legislation in the middle of the sample period leads to a decreasing in abnormal returns over time. Our results are robust to different market models as well as size effects. We conclude that outside investors cannot profit from monitoring and analyzing directors’ dealings on an industry level and recommend a firm-specific level.
Highlights
The existence of insider trading and its possible connections with certain ownership structures, with the design of corporate governance as well as with the occurrence of abnormal returns on international stock markets, is still a current field of research (Hodgson, Seamer & Uylangco, 2018; Antoniadis, Kontsas, & Gkasis, 2019; Chronopoulos, McMillan, Papadimitriou, & Tavakoli, 2019; Hartlieb, 2019).Especially legal insider trading referred to as directors’ dealings, has been the focus of research
When instead of the reporting date the transaction date itself is set as the event date, it is notable that the pre-event Cumulative average abnormal returns (CAARs) are significantly negative, and the positive capital market reaction cannot be observed until the 5-day holding period, at the end of which insiders can earn a CAAR of 1.54%
Abnormal returns observed during the [0, 1] event window, which reflect the ultimate effect on the event day itself, are not significant, which underlines that the information revealed by the transaction itself is not reflected in prices upon the transaction, but rather becomes public later through the official publication of the reported trade and is incorporated in the prices
Summary
The existence of insider trading and its possible connections with certain ownership structures, with the design of corporate governance as well as with the occurrence of abnormal returns on international stock markets, is still a current field of research (Hodgson, Seamer & Uylangco, 2018; Antoniadis, Kontsas, & Gkasis, 2019; Chronopoulos, McMillan, Papadimitriou, & Tavakoli, 2019; Hartlieb, 2019). As insiders tend to purchase stock when they foresee a positive development in their companies’ performance and expect an increase in firm value, one might assume insiders to be more likely to earn (higher) excess returns in industries where the future development of business areas is less predictable for the public rather than in industries with a fairly solid outside predictability of the future performance of business fields. This paper sets out to examine the effects of directors’ dealings by investigating different levels of information asymmetries across industries for the German stock market. In terms of industry effects of directors’ dealings, this analysis cannot verify that stronger capital market reactions to insiders’ transactions can be observed within industries with larger information asymmetries as proxied by average annual investments per company in R&D.
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