Get access

To Trade or Not to Trade: The Strategic Trading of Insiders around News Announcements

Authors

  • Adriana Korczak,

    1. The first and second authors are from the School of Economics, Finance and Management, University of Bristol. The third author is from Cass Business School, City University London. The anonymous referee, Martin Walker (editor), Doug Pederson, Peter Szilagyi, and participants at the 2009 JBFA Capital Markets Conference, the 2007 EFMA Annual Meeting, the 2008 FMA Annual Meeting, and the 2008 FMA European Conference, as well as seminar participants at the University of Bristol, the University of Salamanca and the CFA Society provided very helpful suggestions and comments on earlier drafts of the paper. The authors would like to thank Neslihan Ozkan for sharing her compensation and board structure data with them, and Dmitry Kokhanov for excellent research assistance. The authors remain responsible for any remaining errors.
    Search for more papers by this author
  • Piotr Korczak,

    1. The first and second authors are from the School of Economics, Finance and Management, University of Bristol. The third author is from Cass Business School, City University London. The anonymous referee, Martin Walker (editor), Doug Pederson, Peter Szilagyi, and participants at the 2009 JBFA Capital Markets Conference, the 2007 EFMA Annual Meeting, the 2008 FMA Annual Meeting, and the 2008 FMA European Conference, as well as seminar participants at the University of Bristol, the University of Salamanca and the CFA Society provided very helpful suggestions and comments on earlier drafts of the paper. The authors would like to thank Neslihan Ozkan for sharing her compensation and board structure data with them, and Dmitry Kokhanov for excellent research assistance. The authors remain responsible for any remaining errors.
    Search for more papers by this author
  • Meziane Lasfer

    Corresponding author
    1. The first and second authors are from the School of Economics, Finance and Management, University of Bristol. The third author is from Cass Business School, City University London. The anonymous referee, Martin Walker (editor), Doug Pederson, Peter Szilagyi, and participants at the 2009 JBFA Capital Markets Conference, the 2007 EFMA Annual Meeting, the 2008 FMA Annual Meeting, and the 2008 FMA European Conference, as well as seminar participants at the University of Bristol, the University of Salamanca and the CFA Society provided very helpful suggestions and comments on earlier drafts of the paper. The authors would like to thank Neslihan Ozkan for sharing her compensation and board structure data with them, and Dmitry Kokhanov for excellent research assistance. The authors remain responsible for any remaining errors.
    Search for more papers by this author

Address for correspondence: Piotr Korczak, School of Economics, Finance and Management, University of Bristol, 8 Woodland Road, Bristol BS8 1TN, UK.
e-mail: P.Korczak@bristol.ac.uk

Abstract

Abstract:  We argue that insiders' decisions to trade in short windows before news announcements are likely to result from a trade-off between the incentives to capitalize on the foreknowledge of the disclosure and the risk of regulatory scrutiny and reputation loss. We provide evidence that the decision of insiders to buy is driven by this trade-off. We show that insiders strategically choose the amount of shares bought ahead of good news announcements, as they increase their purchases when the price impact of the news goes up, but the amount of shares purchased levels off as the news becomes extreme. In contrast, their sell trades are primarily influenced by the deterring effect of the regulatory and reputation risks, as the probability of their sell trades decreases significantly with the price impact of the forthcoming bad news. To further support our arguments on the importance of incentives and disincentives to trade, we show that the strategic trading is mainly observed in the most price-sensitive groups of news announcements, and is clearly pronounced for best informed executives (CEOs), and that the trading patterns change with changes in regulations, and insiders with higher reputational risk limit their trading ahead of bad news.

Ancillary