Abstract
We examine the impact of reported insider trading on market liquidity, as measured by an order-size-dependent volume-weighted spread measure, which is called Xetra liquidity measure (XLM). This relationship is scrutinized for the German market both in an event study framework and through a panel data analysis. Overall, we see that insiders seem to trade on days that are very active, most likely to hide their information based trading in higher trading volumes. We discover that the liquidity impact of an insider transaction is highly dependent on the type of the transaction. Insider purchases impair market liquidity on and after the day of the insider transaction, whereas insider sales improve market liquidity on and after the day of the insider transaction. This liquidity impact is due to informational effects as uniformed market participants price protect against the adverse selection generated by informed investors. Uniformed market participants proxy the level of information asymmetry induced by insiders by the share of insider ownership. Hence, the price protection is therefore refl ected in the market liquidity on and after the day of insider purchases. As a consequence insider sales therefore alleviate the information asymmetry as the share of insider holdings is decreased and therefore market liquidity is improved on and after the day of insider sales.
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