Evidence of the contribution of legal insider tradingto market efficiency

Does legal insider trading contribute to market efficiency? Using the refinementproposed by the recent microstructure literature, we analyze the information contentof legal insider trading. Our sample encompasses 2,110 different companies subject to59,244 aggregated daily insider trades over the period from January 1995 to the end ofSeptember 1999. Our main findings are the followings. (i) Consistent with previousliterature, financial markets offer a mild response in terms of abnormal returns toinsider trading activities. (ii) The univariate analysis of stock prices on insider netpurchase and net sale days suggests insiders' market timing ability. (iii) Marketliquidity seems to be weaker on insider net purchase days, indicating that net buyerinsiders are on average market liquidity consumers. (iv) Market liquidity seems to behigher on insider net sale days, indicating that net seller insiders are on averagemarket liquidity providers. (v) The analysis of the considered information proxyreveals that insiders enhance market efficiency. Insider trading clearly permits fasterprice discovery on insider trading days....