The Journal of Business · 1988 · 117 citations · 0 references
Market MicrostructureEmpirical FinanceStock TradingInsider ProfitsMarket ManipulationFinancial EconomicsAccountingBehavioral FinanceManagementBusinessMa NifestationStock Market PredictionFinanceMarket EfficiencySecurity Market
Corporate insiders routinely profit from stock trading, yet outsiders can also earn abnormal returns using publicly available insider‑trading data, challenging market efficiency. The study investigates whether the anomalous outsider profits are driven by size and earnings/price ratio effects. By controlling for size and earnings/price ratio and imposing a 2 % transaction cost, outsider profits are halved, becoming zero or negative. The anomaly persists, yet after a 2 % transaction cost, outsider profits are reduced to a modest 3 % per annum. © 1988, University of Chicago.
That corporate insiders earn profits from stock trading does not surprise most financial economists, but that outsiders can earn abnormal returns by using pub licly-available, insider-trading data constitutes a serious exception to stock-market efficiency. The authors show that this anomaly conti nues to exist despite the publication of studies attesting to its exi stence. They suggest that the anomalous profits to outsiders are a ma nifestation of the size and earnings/price ratio effects. Controlling for these factors reduces outsider profits by half: the additional a ssumption of a 2 percent transactions cost makes outsider profits zer o or negative. Insider profits, after an assumed 2 percent transactio ns cost, are a moderate 3 percent per annum for annual holding period s. Copyright 1988 by the University of Chicago.