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Siraprapa Watakit
5502310013
Are Insider Trades Informative?Lakonishok & Lee [2001]
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Agenda
Overview of The Paper
Contribution
Data and Data Summary
Trading and Reporting Periods Returns Aggregate Insider Trading and Market Returns
InsidersTrades and Cross-Sectional Variation in Stock Returns
Conclusion
2
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Overview of The Paper3
The paper aims at investigating whether the insider trading isinformative and how will the market reactto insider tradinginformation
Insiders are those people who are deemed to have more information
about company; such people are management, CEO or people who hold
substantial wealth of company(10%)
The activity of insiders are heavily demanded. it is still debatablewhether outsiders can profit from knowing
Some research say yes, and some say no How best to interpret these signals is the main objective of this
article.
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Contribution4
Using large data sample of insider trading, the paper presents
empirical result supporting the statement that insider trading IS
informative?
Insider trading gain profit from purchasing small stocks; no
evidence to support that there is profit gain on selling small stock
Even though outsider learn this information, trading small stock
is still costly, thus profit will be offset by transaction cost
Insider seems to have predictive/timing ability. The valuable
information is initially ignored by the market but later (6M later)realizing this information(market underreaction)
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Data5
Stock Exchanges: NYSE/AMEX and NASDAQ(Excludes: non-
common share, ETF, ADR, cheap stock
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Data Summary6
Table1:
Managers are most
active in Large Company
Manager sell >buy
LargeSH trade much
less often but
in much bigger volume
Insider activity is more pronounces in small company
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Data Summary7
Table 2
Overtime, managers wealth are in
company stock; in order to
diversify their wealth, sales are
expected to increase(from $2.6B to $23B)
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Trading and Reporting Periods Returns8
To study a market reaction, abnormal return are calculated at around thetime of insider trading reporting
Table 3
the abnormal returns around the reporting dates of insiders trades arenot economically meaningful and not related /w size
the abnormal returns around the trading dates of insiders trades aresomewhat larger in purchase and small stock
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Aggregate Insider Trading and Market Returns
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Seyhun(1988,1992,1998) shows thataggregate insider trading
significantly predicts future market movements
Methodology: Distinguish between contrarian strategy and insider
trading activity by using NPR Calculate NPR for each group in
each month during Jan/76 to Jan/95, then run regression
Net Purchase Ratio, a
measurement of insider activity
return of portfolio i which
includes no-inside trading stock
prior2y holding
period return
(control
contrarian)
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Aggregate Insider Trading and Market Returns
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Table 41 on the left2 on the righ
1 is significant suggestinsider trading can gain
abnormal return
negative 2 on control
overstating insider tradingabnormal return
manager have more
predictive power than
large sh
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Aggregate Insider Trading and Market Returns
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Figure 1
Crash
Before: Manager become a
heavy seller
After: Manager become a
heavy buyer
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Aggregate Insider Trading and Market Returns
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Other statistics also show that
Insider trader are a better contrarian than outsider
Insider do not tend to buy when there is a large increase in
market return
Insiders were heavy buyers after poor performance of the market
Managers are more contrarian than large share holder
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InsidersTrades and Cross-Sectional
Variation in Stock Returns13
Insiders are definitely active in trading their own stocks, the next
question is will they have ability to predict to predict cross-sectional
variations in stock returns?
form portfolio based on NPR decile
Highest NPR port consist with small stock, Highes NPR portalso outperform Lowest NPR port
Purchase are more informative than sales
Highest NPR port is associated with poor past performance
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InsidersTrades and Cross-Sectional
Variation in Stock Returns14
Regression analysis crssectional regression
DPL and DSL dummy for strong purchase*/sale
signal
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Conclusion15
Insider trading activity is informative
to be more precisely, the activity is very informative on
purchasing side of the small stocks
Insider is a better contrarian
Manager is more contrarian than Large share holder
Market initially ignores the insider trading information at the
reporting period market is under-react
Insider have ability to time the market and to predict the trend of the
market in cross-section
Using daily/montgh data,we can learn about insider trading in a
longer period