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Testing the Insider Trading Anomaly in FTSE-350
Jinxia Meng1, Leping Huang2, Zhou Lu3
1Jiaxing Vocational and Technical College, Jiaxing, China.
Frontiers in Psychology
|March 4, 2022
Summary
This study examines insider trading anomalies, finding that after excluding small firms, insider sales yield higher abnormal returns than purchases. The findings suggest stronger market efficiency, even under the strong-form of the efficient market hypothesis (EMH).
Area of Science:
- Financial Economics
- Market Microstructure
Background:
- Efficient Market Hypothesis (EMH) anomalies are often insignificant when controlling for the small-firm effect.
- The strong-form EMH, which posits that all information is reflected in prices, is particularly challenged by insider trading anomalies.
Purpose of the Study:
- To investigate if the insider trading anomaly persists after excluding small firms.
- To analyze insider purchase and sale patterns and their associated abnormal returns using a novel FTSE-350 dataset.
Main Methods:
- Analysis of insider trading data from the FTSE-350 index.
- Comparison of abnormal returns generated by insider purchases versus sales.
- Assessment of trading costs associated with insider transactions.
Main Results:
- Insider sales generated higher abnormal returns than insider purchases.
- Abnormal returns from insider trading were lower than previously documented in the literature.
- Trading costs associated with insider trades were also found to be lower.
Conclusions:
- The insider trading anomaly's significance is reduced when small firms are excluded.
- Market efficiency, particularly the strong-form EMH, may hold to a greater extent than previously recognized, especially for larger firms.
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