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Insider Trading in the OTC Market

Authors

  • JI-CHAI LIN,

  • JOHN S. HOWE

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    • Both authors are from the Department of Finance, Louisiana State University. We would like to thank K. C. Chen, Maurice Joy, Gary Sanger, participants of the LSU Finance Workshop, and, especially, the co-editor, David Mayers, and an anonymous referee for helpful comments. Remaining errors are our responsibility.


ABSTRACT

In this paper, we examine the profitability of insider trading in firms whose securities trade in the OTC/NASDAQ market. Although the evidence suggests timing and forecasting ability on the part of insiders, high transaction costs (especially bid-ask spreads) appear to eliminate the potential for positive abnormal returns from active trading. By implication, outside investors who mimic the trading of insiders are also precluded from earning abnormal profits. In addition, we provide evidence on the determinants of insiders' profits. The data suggest that insiders closer to the firm trade on more valuable information than insiders removed from the firm.

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