Abstract
In this paper I examine the relationship between credit rating and insider trading of 301 firms from 2000-2006 for S&P 500 Index firms. I argue that changes to the firm credit rating may increase (decrease) informed trading activities. This investigation is essential since insiders with private information may trade opportunistically to maximise profit before such information reaches the stock market. Credit rating downgrade (upgrade) has the potential of changing the capital structure of the firm and hence may affect firm performance in the long run. Such change also affects the level of risk tolerance for equity and debt holders. The results found that higher level of opportunistic trading activities of insiders are strongly associated with weaker credit rating firms. I found also that insider trading activities are associated with changes of firm credit rating in the future. These findings suggest that insiders trade opportunistically to capture market mispricing. Further, firms with stable credit rating appear to have limited insider trading activities. These findings suggest that firm risk do influence trading behaviour of insiders in the capital market.
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