Impacts of insider trading

There are four independent but related essays in this thesis which evaluates the impacts of insider trading in four different aspects. Essay One investigates directors' dealing in Hong Kong. The directors are frequent and heavy traders. The directors accumulate small profits from their trades. An intensive and consistent insider trading strategy earns a higher profit than a conflicting trading one. Director sales are more effective in signaling share price decrease than director purchases in signaling increase. A regression model shows that informed trading volume, firm size, and ownership percentage are significant determinants of the magnitude of insider profits. Insider trading is more likely if there is greater information asymmetry, i.e., when there is a higher proportion of intangible assets and smaller sales volume.Essay Two examines the causality relation between lagged aggregate insider trading activity and general market movement. The vector autoregressive analysis (VAR) finds a significant causality relation. The causality relation is stronger when daily and weekly data are used. This result may be due to the more timely reporting and disclosure procedures for insider trading in Hong Kong. The insider sales are very frequent and, in contrast with the US findings, the lagged insider sales appear to influence subsequent market returns.Essay Three examines the impacts of directors' dealings on firm liquidity. In contrast to the information asymmetry hypothesis, spread falls and depth widens on insider-trading-days as compared to non-insider-trading-days, suggesting that the increased information disclosure enhances liquidity. However, the spread (depth) measures are positively (negatively) related to how heavily the shares are transacted by informed traders. The bid-ask spread decomposition results show that there is enhanced liquidity (reduced adverse selection cost) due to directors' dealings.Essay Four examines directors' dealing around share repurchasing periods in Hong Kong. There are significant insider trading activities before the repurchasing period. However, inconsistent with the signaling hypothesis, directors' purchases (sales) during repurchasing period are significantly lower (higher) than the expected level. A share repurchase is a stronger signal than a director purchase in conveying undervaluation. This study finds no evidence that information signaling is a dominating factor driving the repurchase decision.