Insider Trading and Market Efficiency: Do Insiders Buy Low and Sell High?

Document Type

Article

Publication Date

2010

Abstract

The purpose of this study is to test the semi-strong form efficient market hypothesis by analyzing the effects of insider trading on the risk adjusted rate of return of the firms’ stock prices. Specifically, will insider purchases influence stock price returns on or around the purchase date? If so, this type of information is significant. Also, this study will test the speed of the market’s reaction to this type of information. If the market reacts on or before the event (insider purchase of firms’ stock), then the market conforms to the semi-strong form efficient market hypothesis and no investor can earn an above normal return by acting on this information on the announcement date. Intuitively, one would expect insiders to possess superior non-public information about the future operating and cash flow success of the firm and thereby legally time purchases and sales to maximize the value of their trades.

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