In essence, insider trading is the trading of securities by corporate insiders such as owners, managers and directors. As insiders often possess securities within their companies in exchange for their contributed capital or as part of their remuneration package, trading by insiders is common practice and happens on a day-to-day basis. Nonetheless, insider trading and more specifically the profitability of insider trading is one of the most heavily debated topics among economists, legal scholars and financial market regulators. On the one hand, insiders may just have a better understanding of their firm’s economics which may also give them an informational benefit over other investors. Their in-depth knowledge of, for example, internal company processes, management practices and the industry in which their company operates, may help them to recognize mispricing by the market and improve the timing of their trades. However, on the other hand, insiders may also abuse their position within a company to get access to price-sensitive information, unknown to other investors. Accordingly, if insiders would trade on this superior prior knowledge, this would lead to unfair enrichment at the expense of other investors. This dissertation contributes to the understanding of insider trading and insider trading profitability by exploring a unique database on the trading activity of insiders from Belgian listed companies. The first dissertation paper studies whether the profitability of insider trading was affected by the occurrence of the recent financial crisis. Such a financial crisis creates a chaotic financial environment in which investors react more nervously to news and experience more difficulties in ascertaining the fundamental value of companies. An interesting question is whether this uncertain and turbulent investment environment enlarged the opportunities of insiders to exploit their informational benefit. Our research results show that, while Belgian insiders were generally able to earn excess returns, the magnitude of their trading profits was substantially higher during the years of the financial crisis. The second dissertation paper studies how the dissemination of higher-quality information by companies affects the informational benefit of insiders and in turn the profitability of their trades. If companies are more timely, precise and transparent in their communication, this should improve the quality and quantity of information available to other investors. As a consequence, lower trading profits are earned by insiders in companies with higher-quality communication. Our results furthermore indicate that different forms of communication also differently affect the informational benefit of insiders. Comparing the relative effectiveness of disclosures through annual reports, press releases, websites and investor relation activities, our results show that investor relation activities, which are used to communicate timely and forward-looking information directly to the investor community, appear to be most effective in diminishing the informational benefit of insiders. The third dissertation paper focuses on corporate insider trading policies. These policies are restrictions on insider trading imposed by the issuing companies themselves and fall within the scope of corporate governance mechanisms. In particular, we investigate whether the strictness of the policies differs across companies and which firm characteristics explain these differences. Results show that restrictions are more stringent in companies with more growth opportunities and that stringency also seems to depend on a company’s board structure. In the second part of this study, we analyze the effectiveness of the company-specific trading policies by investigating their impact on the profitability of insiders’ trades. Interestingly, results show that trading profits are not significantly lower in companies with more stringent insider trading restrictions.
Business and Economics, Insider trading, Belgium, Event study
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Ghent University. Faculty of Economics and Business Administration