2003-02 FIN: The Timing and Profitability of Insider Trading in Canada (Working Paper)
McNally, W., & Smith, B.F.
published: 2003 | Research publication | Working Paper - Finance
ABSTRACT: This paper examines the timing and profitability of insider trading in Canada from 1987 to 2000. In contrast to studies done on earlier time periods, we find that insiders are net sellers of shares. This is especially true of senior officers who sell nearly seven shares for every share they purchase. We attribute this change to the increased use of stock options as compensation. Insiders are shown to be contrarian investors. During the twelve-months before they buy (sell), the abnormal stock return is –12.73% (19.01%). In the month around their trades, insiders buy on dips and sell after run-ups. Some types of insiders demonstrate exceptional timing in their trades. Shares bought by affiliated insiders, which includes bank officers and directors, have abnormal long-term performance. Outside directors earn the highest abnormal returns before selling and avoid the greatest losses by timing their sells. Their superior returns are not attributable to selling prior to bad news. The paper finds evidence that some insiders are profiting by violating securities legislation. In particular, we find an abnormal volume of insider sales prior to ‘bad’ news and no decrease in insider purchases prior to ‘good’ news.
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revised Dec 9/04
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