Much work has been conducted on the signalling effect that a directors tradehas on outsiders. This is based on the premise that insiders, or directors,shareholders and managers of companies have access to information abouttheir companies that outsiders do not (Bhana, 2007; Fidrmuc, Goergen andRenneboog, 2006; Hodgson and van Praag, 2006), raising questions about theefficiency of markets (Fidrmuc, Goergen and Renneboog, 2004). Otherresearch concludes that the greater the shareholding percentage or percentagecontrol held by an insider, the greater would be their access to companyinformation, and that this would lead directly to an increase in the strength of thesignal to the market. Hillier and Marshall (2002) find that the abnormal returnsoccur most strongly where directors have increased their shareholding.Fidrmuc, Goergen and Renneboog in various studies found that the opposite istrue, particularly for purchases, citing a perceived danger of increasedentrenchment as the reason for this anomaly. This study will use the AltX of theJSE and attempt to show that there is a positive return on shareholderinvestment following an insider purchase and a negative return on investmentfollowing an insider sale as outsiders react to these signals and the informationcontained in these trades. This study will also attempt to prove that thepercentage control of a director who purchases their own shares has an inverserelationship to the abnormal returns.
This study uses the event study methodology and analyses the abnormalreturns in the event windows extending back to twenty days prior to the eventsand for the following twenty days after the event. Abnormal returns are modelled using the control portfolio model of Mordant and Muller (2003) whichis based on the Fama and French Three-Factor model. These abnormalreturns are then tested for significance using T-tests and the bootstrappingtechnique. Relationships between shareholding interest and returns isestablished using linear correlation.
No statistical significance could be found on the returns compared to the marketfollowing either a purchase or sale insider trade. However, it was found that thereaction to purchases was significantly higher than the reaction to sales, andresults indicate that the reaction to sales on the AltX of the JSE leads toabnormal losses in the short term. This study finds that there is noindistinguishable relationship between shareholding and returns that aredifferent to zero. While it is clear that other bourses internationally demonstrateclear evidence of the existence of signals contained in insider trades, and otherSouth African studies find corroborative evidence on the JSE main board, thereis no evidence that insider trades on the AltX contain any signalling value inthem for outsiders, particularly pertaining to purchases. Although noteconomically significant, sales do suggest that there is information contained inthe trade, but is this reaction in the market due to the information contained inthe trade, or simply due to a culture of trading on market sentiment?
Copyright © 2008 University of Pretoria. All rights reserved. The copyright in this work vests in the University of Pretoria. No part of this work may be reproduced or transmitted in any form or by any means, without the prior written permission of the University of Pretoria.
Please cite as follows:
Baty, M 2008, Insider trading as a signal used in investment decisions on the AltX : the influence of insider ownership and control, MBA dissertation, University of Pretoria, Pretoria, viewed yymmdd < http://upetd.up.ac.za/thesis/available/etd-04232010-124611/ >
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