Insider Trading and Corporate Governance - the Case of Germany

Abstract

We analyze transactions by corporate insiders in Germany, a country with a bank-dominated financial system. Insider purchases [sales] are associated with positive [negative] cumulative abnormal returns (CARs). We relate the magnitude of the CARs to the position of the insider within the firm and the ownership structure of the firm. Insider sales in firms with dispersed ownership structure have a larger price impact. Inconsistent with the informational hierarchy hypothesis, the position of the insider within the firm does not have a discernible impact on the magnitude of the CARs. We also document that insider trades that occur prior to an earnings announcement have a larger price impact. This result provides a rationale for the UK regulation that prohibits insiders from trading prior to earnings announcements.

Keywords: Insider trading, directors' dealings, corporate governance

JEL Classification: G14, G30, G32