Abstract
The objective with this article was to determine whether insider trading related to unannounced dividend policy changes provided abnormal returns for shares listed on the Johannesburg Stock Exchange (JSE). The results indicate that insiders as a group seem to exhibit 'remarkable timing ability'. Significant changes in insider trading activity were detected during the six-month period prior to the resumption (omission) announcement. Company insiders trading prior to dividend changes announcements earned consistently large positive abnormal returns (avoid large negative abnormal returns). It is recommended that company insiders be required to make public the market positions they take in their company's shares. This can be expected to reduce the abnormal returns derived from insider trading and will also contribute towards improving the efficiency of the JSE.
Highlights
Section 440F(l) of the Companies Second Amendment Act (No 69) of 1990 prohibits the exploitation of inside information by company directors, officers and other persons, usually referred to as insiders
The existence of insider profits has been deemed evidence inconsistent with the strong form of the efficient market hypothesis (EMH) which states that all information - public and private - is fully reflected in share prices
Profits to outsiders who merely mimic insider trades are a serious exception to the EMH because they violate the semistrong form of market efficiency, which states that all publicly available information is fully reflected in security prices
Summary
Section 440F(l) of the Companies Second Amendment Act (No 69) of 1990 prohibits the exploitation of inside information by company directors, officers and other persons, usually referred to as insiders. Corporate insiders are explicitly prohibited from trading on non-public information. Research in more developed countries such as the United States of America and the United Kingdom suggests that insiders do trade profitably on non-public information despite strict legal sanctions against such activities. Outsiders can earn abnormal returns by using publicly available information concerning insider trading appearing in official publications. The existence of insider profits has been deemed evidence inconsistent with the strong form of the EMH which states that all information - public and private - is fully reflected in share prices. Profits to outsiders who merely mimic insider trades are a serious exception to the EMH because they violate the semistrong form of market efficiency, which states that all publicly available information is fully reflected in security prices
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