Insider trading on the Stockholm Stock Exchange : Non reported insider trading prior to profit warnings
Background:Studying insider trading is difficult due to its sensitive and delicate nature. Therefore it is hard to gauge the extent of such activities. This problem has resulted in a fierce debate whether it should be prohibited or not. Using a method where the effect on monopolistic information usage can be isolated insider trading can be monitored. Such an event is a profit warning.Purpose:This paper examines whether insider trading exist for companiesmaking a profit warning between year 2003 and 2007 on the StockholmStock Exchange. Furthermore the aim with the study is to contributeto the debate on the insider trading legislation.Method:The study’s purpose is achieved through an event study studying thecumulative abnormal return as well as average daily returns duringthe thirty days preceding the warning for a sample of thirty companies.Since profit warnings should be completely random and as suchalmost impossible for the market to know in advance, a significantabnormal return can only be explained with insider trading. The abnormal returns were calculated using the Capital Asset Pricing Modelsince it is the most widely used model.Conclusion:For the chosen time frame, when testing on a 95% significance level,the study found a significant abnormal return during the last 10 daysof the event window but not for the entire period of thirty days. Thedaily average return for the thirty companies were significant for sixof the thirty days within the event window. Two of them were includedin the last ten day period with a confirmed significant abnormalreturn which might suggest that on average insider trading tendto occur during these days. The other four was discarded due tosample issues. Since the study was limited to a period of four yearsextending the results to a period other than tested should be madewith great care since conditions may differ over time. Concerning thecurrent debate on the insider legislation, the findings can be used byboth sides. Either to argue for a strengthening of the law or to question its existence.
School:Högskolan i Jönköping
Source Type:Master's Thesis
Keywords:insider trading profit warnings price drift event study capm
Date of Publication:10/10/2007