Quasi-Private Information and Insider Trading

Martha L. Carter, Sattar A. Mansi and David M. Reeb

Financial Analysts Journal, 2003, vol. 59, issue 3, 60-68

Abstract: We investigated the informational content of corporate insider buying activity and concluded that the market impact of insider transactions varies with the length of interval between insider buy transactions and the disclosure of information to the public. Analysis of a sample obtained from the Washington Services Insider Trade database indicates that (1) the informational content of insider transactions leaks out prior to the U.S. SEC announcement, (2) information leakage is positively associated with the length of the interval between the insider buying activity and the SEC announcement, (3) information leakage for CEOs and other officers differs only marginally, and (4) those insiders with the longest delay in reporting have the greatest total impact on stock prices. Our findings suggest that insiders are able to use their disclosure timing to manipulate the stock price impact of their buying activity. Although prior studies on insider trading have documented a positive correlation between insider trades and stock price changes, most of these studies focused on either the abnormal returns after insider trading transactions or the speed with which private information is absorbed in stock prices. In this study, we address an alternative view—the impact of the timing of insider trading announcements on stock prices. Specifically, we examined the length of the reporting interval between the insider buying activity and the disclosure of the information to the public. That is, we explored whether the reporting interval is related to the timing and the size of stock price impact. We posited that the longer the time interval between the insider trade and the disclosure of the trade, the greater the potential for pre-announcement stock price run-ups. We also examined whether two types of corporate insiders (CEOs and “others”) differ in their dissemination of information (leakage) and their disclosure timing.Our analysis suggests that insider buying activity has an effect on stock prices that is positively related to the length of the reporting period. The insider transactions with the longest reporting intervals have the greatest information leakage and the greatest total impact on stock prices. We found that about 15 percent of insiders' buying transactions are reported beyond the maximum SEC allowable time window (a maximum of 41 calendar days for the disclosure of the insider trade to the public). Overall, the results indicate that insiders are able to use their disclosure timing to manipulate the impact of their buying activity on stock prices. Traders with access to predisclosure insider buying information are also able to earn excess return from this disclosure delay.Our empirical analysis provides important insights concerning the effects of insider buying activity and, in general, supports the information leakage hypothesis. We provide evidence on the disclosure of insider buying activity and its impact on stock returns. We found that the decision of the insider to delay reporting of trading activity increases the time to incorporate quasi-private information into market prices but that a substantial portion of this information leaks out prior to the public announcement. We also found evidence consistent with the hypothesis that the amount of leakage is a function of the length of the reporting interval. Although our analysis suggests that information leakage is a concern for both CEOs and other officers, because we found similar reporting patterns for both groups, the results indicate that the reporting-interval impact is greater for CEOs than for the other officers.

Date: 2003
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DOI: 10.2469/faj.v59.n3.2532

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