Abstract
This paper aims to examine how corporate insider trading influences trading patterns of foreign and institutional investors especially in firms with high discretionary accruals and low book-to-market ratios as proxies for information uncertainty. This study uses methods such as trading patterns of informed traders who are considered to gather more precise information before and after insider trading and tests how insider trading affects informed traders. The results of this study provide evidence that insider trading is likely to influence informed traders’ trading patterns. After controlling for firm-specific factors, this study finds that the event and the amount of insider trading affect significantly foreign and institutional trading patterns. Furthermore, the relation between informed trading and insider trading is more enhanced when firms have a high level of discretionary accruals and a low book-to-market ratio. Prior studies have focused on the association between abnormal returns of insider trading and types of insider information disseminated, while informed trading patterns and insider trading with information uncertainty have not been specifically considered. This study enables practitioners to interpret corporate insider trading with information uncertainty on informed trading patterns.
Highlights
Corporate insider trading is regulated in many countries
This paper aims to examine how corporate insider trading influences trading patterns of foreign and institutional investors especially in firms with high discretionary accruals and low book-to-market ratios as proxies for information uncertainty
This study finds that the relation between informed trading and insider trading is more enhanced in firms with a high level of discretionary accruals and low book-to-market ratios
Summary
Financial regulators in Korea reveal new financial policies, focusing on intensified regulation of unfair trading including corporate insider trading. Following this movement, unfair trading can be strongly monitored, insider trading may decrease, containing informative insider trading as of signaling channel of firms. Prior literature report that insider trading could reduce stock demand and return rates of outsiders by information asymmetry, while insider trading could reduce investment risk by spreading out useful information of firms [1]. This study focuses on trading patterns of informed traders who are considered to gather more precise information before and after insider trading and tests how insider trading affects informed traders. Lee [11] test that insiders in smaller firms may have more information of future returns
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