An Empirical Analysis of Illegal Insider Trading

1
An Empirical Analysis of Illegal Insider Trading

• By Lisa K. Meulbroek
• Journal of Finance 1992

2
Central Debate

• Opponents
• decreases market liquidity
• abusive managerial practices
• unfair to uninformed investors

• Proponents
• improves the accuracy of stock prices
• promotes quick price discovery
• fosters efficient capital markets

3
Objective

• Investigates effects of insider trading on stock
  price
• Previous research focuses on legal trading
• This paper uses illegal trading detected by the
  SEC from 1980 to 1989

4
Insider Trading Law

• SEC rule 10b-5 of 1934 Act
• not just corporate insiders
• information is material
• intent to deceive, manipulate or defraud
• SEC rule 14e-3 under Williams Act 1968
• ITSA and 1988 Act increased civil and criminal
  penalties

5
Empirical Analysis

• Increases accuracy of securities prices
• sign
• Stock prices move significantly
• t-test and z-test
• Stock price accuracy increases on insider trading
  days
• run-up

6
How Does Info Become Incorporated into Price?

• Total volume on insider trading day is higher
  than expected
• Insider trading volume accounts for most of
  unusual volume

7
Conclusion

• Immediate price movement and quick price
  discovery, supports proponents claim
• Large run-up suggests market impounds a large
  proportion of the info before it becomes public
• Trade volume, direction and frequency signal
  presence of an informed trader
• Regulation implications