The authors are grâteful to an anonymous referee for very useful comments. The authors are solely responsible for the contents of the paper.
Insider Trading and the Bid-Ask Spread
Version of Record online: 9 MAR 2005
Volume 33, Issue 3, pages 1–20, August 1998
How to Cite
Chung, K. H. and Charoenwong, C. (1998), Insider Trading and the Bid-Ask Spread. Financial Review, 33: 1–20. doi: 10.1111/j.1540-6288.1998.tb01379.x
- Issue online: 9 MAR 2005
- Version of Record online: 9 MAR 2005
- bid-ask spread, insider trading
This study examines the intertemporal and cross-sectional association between the bid-ask spread and insider trading. Empirical results from the cross-sectional regression analysis reveal that market makers establish larger spreads for stocks with a greater extent of insider trading. The time-series regression analysis, however, finds no evidence of spread changes on insider trading days. These results suggest that although market makers may not be able to detect insider trading when it occurs, they protect themselves by maintaining larger spreads for stocks with a greater tendency of insider trading. The results also reveal that market makers establish larger spreads when there are unusually large transactions. In addition, this study finds that spreads are positively associated with risk and negatively with trading volume, the number of exchange listings, share price, and firm size.