Insiders’ Profits in the Australian Equities Market
35 Pages Posted: 3 May 2016 Last revised: 3 Jul 2023
Date Written: September 23, 2022
Abstract
We investigate if directors of Australian companies can generate abnormal returns on their reported trades, if these abnormal returns are significant enough to be mimicked by outsiders, and if insider trades have an effect on returns of other investors. We find that insiders take advantage of their private information in stocks of larger corporations, but generally do not in medium and small capitalization firms, indicating that the insiders are attracted to the liquidity and a greater presence of uninformed traders in large stocks. Insiders are able to determine the value of their information by trading larger volumes and larger portions of their holdings when they have access to valuable information. We find that outsiders can make profitable trades net of transaction costs by following insiders’ sale trades in large and medium size firms, and otherwise result in net losses for outsiders. They accumulate on average a net abnormal profit of 4.17% after a year following their sale trade. We propose that the market quality can be improved with public access to good quality aggregated data on reported director insider trades.
Keywords: Insider Trading, CAAR
JEL Classification: G12, G14, G18
Suggested Citation: Suggested Citation