Download Are Directors Dealings Informative?

Are Directors' Dealings Informative?
Evidence from European Stock Markets
Kaspar Dardas*
European Business School
Andre Güttler†
European Business School
Abstract
Are directors' dealings reports informative for outside investors? We analyze short-term
announcement effects for 2,782 companies from eight European countries between 01/2003 and
12/2009. We find significant announcement effects in four out of eight countries after directors'
dealings reports have been disclosed. For most countries the magnitude of the announcement effect
depends on transaction size, firm size, book to market ratio, and multiple trades by different insiders
on the same trading day. The results are stronger for purchases than for sales. For France, Ireland and
Sweden we find tentative evidence that the corporate position of an insider is connected to the size of
the announcement effect.
JEL classification: G14, G15
Keywords: Directors' dealings, Market Abuse Directive, Insider hierarchy, R&D intensity
*
Department of Finance, Accounting and Real Estate, EBS Business School, Gustav-Stresemann-Ring 3, 65189
Wiesbaden, Germany, E-mail: [email protected], +49 173 305 8889 (Corresponding author).
†
Department of Finance, Accounting and Real Estate, EBS Business School, Gustav-Stresemann-Ring 3, 65189
Wiesbaden, Germany, E-mail: [email protected]
We thank an anonymous referee for very helpful comments. We also thank 2IQ Research for providing the data
for our analysis. Any remaining errors are our own.
In the past decade, the use of directors’ dealings reports in stock analysis has become common practice
among financial professionals. The rationale behind it is that substantial information asymmetries exist
between company insiders and outside investors.1 Since insiders are involved in the day-to-day
business of a company, they are expected to be better informed about the true value of their company’s
assets than any other investor. Thus, whenever insiders trade stocks of their company, they are
assumed to be revealing new information.
We investigate whether directors’ dealings reports are informative for outside investors. We
analyze short-term announcement effects for 2,782 companies from eight European countries, namely
Austria, France, Germany, Ireland, Italy, the Netherlands, Sweden, and the U.K, with an observation
period between 01/2003 and 12/2009. Our main findings show that there are significant announcement
effects in four out of eight countries after directors’ dealings reports have been disclosed. We find that
the magnitude of the announcement effect is higher for purchases than for sales. We also conclude that
the magnitude of the announcement effect depends heavily on transaction size. Factors such as firm
size, book to market ratio, or multiple trading by different directors on the same day have an influence
on announcement effects. For France, Ireland and Sweden we find tentative evidence that the
corporate position of an insider is connected to the size of the announcement effect. Moreover, we
show that in some countries the recently implemented Market Abuse Directive had a noticeable effect
on the information content of directors' dealings. We further conclude that directors’ dealings reports
lead to largest announcement effects in the healthcare and energy sectors.
Previous studies based on directors’ dealings reports show that company insiders generate
abnormal returns by trading stocks of their company (e.g. Seyhun (1986), Rozeff and Zaman (1988),
Lin and Howe, (1990), Lakonishok and Lee (2001)). Others focus on the long-term abnormal returns
generated by company insiders. For instance, Rozeff and Zaman (1988) examine whether outsiders are
able to earn abnormal profits by mimicking insiders. Since the information on the insider trade takes
some time to reach the market, they conduct the outsider performance test by imposing a two-month
trading lag when creating the outsider portfolios. They find that outsiders are indeed able to generate
1
We use the terms “insiders” and “directors” interchangeably unless stated otherwise. Thus, we do not follow
the strict U.K. definition of “directors” but rather refer to all company insiders whenever using the term
“directors”.
1
abnormal returns. However, after including transaction costs, the outsider profits disappear entirely. In
contrast, by using U.S. data Bettis, Vickrey, and Vickrey (1997) show that outsiders are able to make
significant profits. They measure weekly abnormal returns by using large-volume insider trades as
event triggers and find that outsiders are able to make statistically and economically significant
abnormal returns net of transaction costs for holding periods that are longer than 13 weeks.
Specifically, they report an abnormal return of 6% for a holding period of 26 weeks.2
More-recently published studies focus on the immediate effects of insider trading around
announcement and/or trading days. Lakonishok and Lee (2001) examine a five-day period after the
announcement as well as after the trading day for U.S. stocks. Only for trades by insiders of small
capitalization firms do they detect an abnormal return of 0.93% subsequent to the trading day.
Friedrich et al. (2002) examine short-term daily returns following the trading days of insiders for the
U.K. They do not find evidence that outsiders are able to earn economically significant returns net of
transaction costs.
Previous research on directors’ dealings is mostly concentrated on the U.S. and U.K. This is
obviously due to the long history of insider regulation in both countries. The existence of
announcement effects is undisputed in both countries. However, research on directors’ dealings in
continental Europe shows mixed results. Klinge et al. (2005), Stotz (2006), Dymke and Walter (2008),
and Betzer and Theissen (2009) find significant abnormal returns based on directors’ dealings in
Germany. On the other hand, Eckbo and Smith (1998) do not find any effects in the Norwegian stock
market. Del Brio et al. (2002) find that insiders are able to earn abnormal returns in Spain. For the
Italian market, Bajo et al. (2006) observe that abnormal market performance occurs after an insider’s
transaction, usually between the first and the third month after the insider trade. Zingg et al. (2007)
find that outsiders who mimic small insider transactions can earn abnormal returns in the Swiss stock
market. For the Netherlands, Degryse et al. (2009) find significantly positive abnormal returns after
purchases by directors and supervisory board members.3 Recently, two studies examine insider
dealings in a broad selection of countries. Fidrmuc et al. (2010) investigate the dependence of market
2
For long-term studies, which examine portfolios based on insider trades see Jeng et al. (2003) for the U.S. and
Giamouridis et al. (2008) for the UK.
3
See also Kallunki et al. (2009), who investigate the motives of Swedish insiders to trade stocks of their firms.
2
price reaction to insider transactions and corporate governance in 16 countries. They find that market
reaction to insider purchases is larger in countries with good corporate governance. Aussenegg and
Ranzi (2008) examine the market reactions to directors’ dealings reports in seven European countries
of German and French legal origin.4 They show that information asymmetries between insiders and
outsiders are stronger in German law than in French law countries. In both of the above cross-country
studies, the authors pool countries based on their legal origin and investigated market reactions of
these pooled samples.
This paper contributes in the following ways to the existing literature. First, with regard to other
cross-country studies on legal insider trading we focus our analysis on single countries and not on
pooled country samples. This study structure allows us to control for country-specific regulatory
changes, which have been implemented during our observation period. Specifically, the E.U. Market
Abuse which aims to harmonize financial markets across Europe. Thus for each country from our data
sample, we give a short overview on the regulatory changes with respect to directors' dealings and test
whether these changes had an effect on the information content of directors' dealings reports.
Moreover, we want to show in which countries and under which conditions directors’ dealings reports
are most informative. To give a clear answer as to whether directors’ dealings announcements are
informative or not, we see the need to investigate each country individually. After all, outside
investors purchase/sell stocks in single country exchanges and not according to factors such as the
legal origin of a country. Our parallel structured cross-country analysis is also unique in its detailed
examination of the insider hierarchy hypothesis, which states that the corporate position of an insider
causes different announcement effects. This is aided by our data quality, which allows us to identify
the insider position for each single transaction. To the best of our knowledge, the insider hierarchy
hypothesis is unexplored for most of the countries in our study.5 Second, we put a strong emphasis on
the comparability of results between each country in our analysis. A remarkable aspect of most
European studies is that results are often compared to the results from benchmark studies of the U.K.
or U.S. (e.g. Dymke and Walter (2008), Degryse et al. (2009)). Yet in the U.K. and U.S. papers, the
4
Aussenegg and Ranzi (2008) classify countries according to the legal origin as defined by La Porta et al.
(1998).
5
The insider hierarch hypothesis has been previously examined for the U.K. by Fidrmuc et al. (2006) and for
Germany by Dymke and Walter (2008) and Betzer and Theissen (2009).
3
event studies are applied over substantially longer and different observation periods than in
(Continental) European studies. The comparability of event-study results obtained from different
observation periods is problematic because event studies are affected by time-varying idiosyncratic
risk. The power and specification of event studies is consequently not stable through time. Therefore, a
comparison of event study results from substantially different observation periods might lead to
erroneous conclusions. For that reason, our paper analyses announcement effects for different markets
with almost identical time periods, identically constructed benchmark indices, and analogous eventstudy variables. Third, due to the quality of our dataset we were able to use only pure buy and sell
transactions, which allows an unbiased examination of announcement effects for each single country.
For instance, we exclude transactions related to mergers and acquisitions and any other type of
transaction that might distort a clear examination of the announcement effect.6 Finally, we examine
which industry sectors show highest announcement returns to directors’ dealings reports in European
stock markets, which is also novel to the literature.7
The rest of the paper is organized as follows. Section I gives a short overview of the directors’
dealings regulations in Europe. Section II derives our main hypotheses from previous literature.
Section III describes our data and methodology. Section IV analyzes the results and Section V
concludes the paper.
I.
European Regulation on Directors’ Dealings
In the U.S., the reporting duty of directors' dealings has a long tradition with legislation in place
since 1934. The U.K. was the first country in Europe to implement insider trading laws. Its history of
regulating directors’ dealings goes as far back as 1979, with the implementation of the 1977 Model
Code. The 1985 Companies Act, enacted in 1985 extended this regulatory framework. It required the
immediate reporting of insider transactions, no later than the fifth business day after an insider trade
has been made. In addition, it had a narrow definition of who is considered a company insider. Only
6
Fidrmuc et al. (2006) investigate the impact of news releases prior to directors’ transactions for the U.K.
market. They find that market reactions to insider trades are mostly influenced following the news of mergers
and acquisitions.
7
Whenever we use the term “insider trading” we refer to legal insider trading unless stated otherwise. For a
study on illegal insider trading (in credit derivatives markets) see Acharya and Johnson (2007).
4
executive board members and non-executive directors were required to report their trades, whereas
large shareholders were excluded from reporting. A remarkable characteristic of the U.K. regulation
was and still is the existence of extensive blackout periods. In particular, the U.K. regulator requires a
two-month trading gap prior to final and interim earnings announcements.8
Most other European countries did not implement directors’ dealings regulations before the
1990s.9 Moreover, all European countries regulated insider trading differently in terms of the
definition of an insider and inside information. The implementation of the Council Directive
89/592/EEC in 1992 brought a change to these inconsistent regulations.10 This was the first adoption
of a directive by the European Parliament to control for insider trading across all European capital
markets. Nevertheless, this directive gave each member state a wide range of freedom concerning the
implementation and enforcement of insider trading laws. In 2004, the more comprehensive Market
Abuse Directive 2003/6/EC (2004/72/EC) replaced it.11 The Market Abuse Directive, which is
currently valid for all European Union states, requires all members to establish minimum standards for
regulating insider trading. The member states must ensure that directors’ dealings reports are made
within five business days and contain crucial information such as size, price, and the characteristic of
the transaction. The directive also defines the people who are obliged to report transactions. In
particular, all persons in managerial positions, as well as their families and institutions that are
associated with these persons, are required to report their transactions.12 Furthermore, the E.U.
directive requires companies to report the names of all insiders by the issuers and to update this
information regularly. All member states can implement a 5,000-euro notification barrier. Thus, small
transactions only have to be reported if the accumulated transaction size exceeds 5,000 euros in a
calendar year. In 2007 another directive which aims to improve reporting standards and harmonize
8
For a detailed overview of insider trading regulations in the U.K., see Pope et al. (1990) and Fidrmuc et al.
(2006).
9
See also Gersbach and Nedwed (1991) who present arguments for and against regulations on insider trading.
10
The release date of 89/592/EEC is 13/11/1989; the effective date is 01/06/1992.
11
The Commission Directive 2004/72/EC is an extension of the Market Abuse Directive 2003/6/EC. It gives
detailed requirements on directors’ dealings reporting standards.
12
According to 2004/72/EC, art. 1(1), a “person discharging managerial responsibilities within an issuer shall
mean a person who is (a) a member of the administrative, management or supervisory bodies of the issuer; (b) a
senior executive, who is not a member of the bodies as referred to in point (a), having regular access to inside
information relating, directly or indirectly, to the issuer, and the power to make managerial decisions affecting
the future developments and business prospects of this issuer.”
5
financial reporting within the E.U. was implemented. This so-called Transparency Directive
2004/109/EG (2007/14/EG) requires each member state to ensure that there is at least one officially
appointed mechanism for the central storage of regulated information. Moreover, it states that issuers
must ensure appropriate transparency for investors through a regular flow of publicly available
information and that corporate fillings have to be reported electronically with an easy access by end
users. The Transparency Directive mainly focuses on shareholding disclosures and periodical financial
reports, however, it also implies an increased demand for reporting standards on directors' dealings.
Table I documents the official implementation dates of the Market Abuse Directive 2003/6/EC as well
as the Transparency Directive 2004/109/EG in each country from our data sample. It is noteworthy
that for some countries the Market Abuse Directive had a strong impact on the legal framework with
regard to directors’ dealings whilst for others it had almost none. For the U.K. and Ireland, for instance
the directives brought only relatively small changes regarding the regulations on directors' dealings
because both countries had well-established regulatory frameworks beforehand. However, for
countries such as Austria, Germany and France the Market Abuse Directive changed the regulations
on directors' dealings fundamentally and improved the reporting standards significantly (see Table I).13
II.
Hypothesis Development
Our approach is to examine the short-term abnormal returns within a five-day period subsequent
to the announcement of an insider transaction. We expect share prices to adjust within several days
after the buying/selling signals have been given to the market. If insiders are indeed able to identify
whether their company is over-/undervalued and if insiders give clear signals to the market by buying
or selling stocks of their company, then investors should react quickly. Therefore, we examine the
following hypotheses.
Hypothesis 1: The announcement of purchases (sales) by insiders leads to immediate positive
(negative) abnormal returns in the underlying share.
13
See Mazars (2010), the European Commission web page on the Market Abuse Directive:
http://ec.europa.eu/internal_market/securities/abuse/index_en.htm, European Commission web page on the
Transparency Directive:http://ec.europa.eu/internal_market/securities/transparency/index_en.htm.
6
Fidrmuc et al. (2006) report higher abnormal returns for large transactions than for small
transactions in the U.K. Betzer and Theissen (2009) obtain similar results for the German market.14
Following these findings, we assume that announcements of large transactions give stronger signals to
the market than announcements of small transactions.
Hypothesis 2: The announcement of large purchases (sales) by insiders leads to larger
positive (negative) abnormal returns than the announcement of small purchases.
We proceed by examining the relation between an insider’s position in the company and the size
of the announcement effect. It is rational to assume that top-level executives should have an advantage
over low-level executives in obtaining relevant information about changes in the firm’s value. Market
reactions should be stronger following the announcement of trades made by high-level executives than
by low-level executives. However, Fidrmuc et al. (2006) show that abnormal returns following the
announcements of top-level executives in the U.K. are significantly lower than following the
announcements of other directors.15 Dymke and Walter (2008) obtain similar results for the German
market. These, on first sight, counterintuitive results might be explained by the fact that top-level
executives are followed more closely by regulatory authorities and therefore trade at less informative
moments. To see whether this is also the case for the countries in our data set we test each country for
the so-called insider hierarchy hypothesis.
Hypothesis 3: The announcement of trades by top-level executives will result in stronger
reactions in the market than the announcement of trades by other directors.
14
Fidrmuc et al. (2006) as well as Betzer and Theissen (2009) define large trades when the trading volume
exceeds 0.1% of the volume of shares outstanding.
15
See also Jeng et al. (2003).
7
In addition, we assume that multiple purchases (sales) by several insiders on the same day will
give a stronger signal to the market than a single transaction by one insider. We believe that the
announcement effect increases with the number of insider transactions.
Hypothesis 4: The announcement of multiple purchases (sales) by different insiders on the same
day leads to larger positive (negative) abnormal returns than the announcement of single
purchases.
Previous studies have shown that firm size in terms of market capitalization has a substantial
influence on the announcement effect. Lakonishok and Lee (2001) conclude that directors’ dealing
announcements for small capitalization firms show a significantly larger market reaction than in the
case of large firms. Aussenegg and Ranzi (2008) also find a reverse relationship between abnormal
returns after trade announcements and firm size for several European countries. Since analysts follow
small firms less closely than they follow large firms, the information asymmetry is larger for small
firms. Therefore, the possible new information that a directors’ dealings report contains about a small
firm is more significant than in the case of a large firm. We assume the same for our data and therefore
we state the hypothesis:
Hypothesis 5: The announcement of insider purchases (sales) in small firms leads to larger
positive (negative) abnormal returns than the announcement of insider purchases in large firms.
A final investigation concentrates on industry sectors. For the U.S., Aboody and Lev (2000)
showed that insiders gain higher returns in R&D-intensive firms than in firms with less R&D. The
rationale behind it is that information asymmetries are higher in R&D-intensive firms due to the
uncertainty of the outcome of R&D projects. This lets us assume that insiders might gain higher
returns in R&D-intensive sectors such as healthcare and IT compared to sectors that are less R&Dintensive, such as consumer goods.
8
Hypothesis 6: The announcement of insider purchases (sales) in R&D-intense sectors leads to
larger positive (negative) abnormal returns than the announcement of insider purchases (sales)
in sectors with a low R&D intensity.
III.
Data Sources, Descriptive Statistics, and Methodology
A. Data Sources
Our data on directors’ dealing reports come from 2iQ Research, a data vendor that specializes in
European insider trading. Whereas the source data is downloaded from stock exchange internet pages,
adhoc news portals or directly from company websites and enhanced with qualitative research, which
we will describe below. The original database contains a total of 151,989 insider transactions in
exchange-listed companies from Austria, France, Germany, Ireland, Italy, the Netherlands, Sweden,
and the U.K. We chose (with a few exceptions) the same observation period for each country,
beginning on January 1, 2003 and ending on December 31, 2009. This allows us to examine the most
extensive data sample, which includes all countries. Each transaction includes information on
company name, insider name, insider position, trade date, trade size, announcement date, transaction
type (11 different types), and security type (10 different types). In addition, some transaction types are
marked with 14 characteristics that further specify each transaction. These characteristics identify
whether a buy/sell transaction is option/award/plan related, merger related, tax liability related, capital
increase related, a dividend reinvestment, a private placement, or remuneration. For instance, a sell
transaction might be marked as “tax related”, which leads to an exclusion of this transaction from our
study. Each single transaction has been researched for relevant company news around the transaction
day and marked accordingly. This unique data quality allows us to filter only pure buy and sell
transactions for each single country. In particular, Fidrmuc et al. (2006) point out the importance of
controlling for merger related transactions, since these transactions decrease the announcement effect
almost to zero.
The most common transaction types in the original dataset (before filter rules are applied) can
be categorized as buys (55.93% of all transactions), sales (33.91%), exercises (5.95%) and
subscriptions (1.87%). We applied strict rules to modify this initial dataset. First, we dropped planned,
9
private, dividend related, merger related, tax related, neutral, and compensation transactions. This rule
mainly eliminated transactions such as exercises, subscriptions, dividend reinvestments, or exercise
related sales. Second, we dropped security types such as ADRs, bonds, options, and stock swaps and
kept only ordinary shares. Furthermore, we dropped all transactions that are not in the currency of the
respective domestic exchange. These filters decreased the sample to 72.46% of the original
observations to 110,128 transactions. Moreover, we dropped all observations where the transaction
price deviated by more than 20% from the securities’ closing price on that day. This rule further
minimizes the likelihood that private or compensation-based transactions are included in the sample.
Furthermore, we dropped all issuer-based transactions and transactions that were reported 20 calendar
days past the transaction date, since we believe that these directors’ dealing reports attract only
minimal attention in the markets.16 These rules decreased the data sample to 58.64% of the original
observations (89,125 transactions). We also excluded transactions made by investment firms as well as
funds, unless they are controlled by an insider and aggregate multiple transactions by the same insider
on the same day. Based on this aggregation we define the total traded volume of an insider as a net
purchase or sale. To avoid unnecessary noise we excluded transactions with an aggregated trade
volume of less than 1,000 euros. This reduced the dataset to the final sample number of 44,907
observed transactions, which represents 29.52% of the initial sample. Table II gives a detailed
overview of this final data set.
Daily share returns, book values, and shares outstanding are obtained from Compustat. We also
use the Compustat database to track any changes in company names. For each country we use the
country-specific (Gross) MSCI Barra Performance Share Indices to calculate risk-adjusted returns.17
All transactions are converted into euros for non-euro countries using the daily exchange rate of the
announcement date from Compustat.
16
Before the implementation of the Market Abuse Directive 2003/6/EC, most European countries did not have
any requirements for timely reporting of directors’ dealings (see also Table I). Even after the implementation of
the directive, some transactions are not reported within the required five business day range. Therefore, for about
5% of the transactions described above, the difference between reporting and transaction day is longer than 20
calendar days.
17
“Gross” refers to the maximum possible dividend reinvestment. The amount reinvested is the entire dividend
distributed to individuals resident in the country of the company, but does not include tax credits.
10
B. Descriptive Statistics
Table III shows the descriptive statistics for our initial data sample, which includes net
purchases, sales, option related sales, and exercises. Similar to Lakonishok and Lee (2001) and
Fidrmuc et al. (2006), we calculate the (relative) trading frequencies per firm and year for each
country.18 Directors in Germany, Ireland, and the U.K. have the lowest average trading frequency of
all countries. On the other hand, Italy, the Netherlands, and Sweden seem to have extremely active
insider trading. The biggest difference in (relative) insider trading frequency is between Germany
(average 3.60 trades per firm and year) and Italy (average 8.54 trades per firm and year). There are
several possible reasons why the average trade numbers vary between countries. First, there is a
technical issue concerning how insider trades are reported in certain countries. Sweden and the
Netherlands have a detailed accounting style of reporting insider transactions, which artificially
inflates the number of transactions. In the Netherlands, for instance, an option exercise followed by the
sale of the underlying shares is reported as three transactions in separated reports: the exercise of
options, the subsequent purchase of the underlying shares, and the sale of these shares. In Germany,
the U.K., and Ireland, such transactions are mostly reported as single sell transactions with a short note
in the report that states that the transaction is option related.
Second, the legal definitions of insiders vary across countries, resulting in different numbers of
people acting as insiders. Countries that have a wide definition of insiders will consequently have
more persons acting as insiders and thus have a higher number of insider trades. Italy, for instance, has
the broadest definition of insiders among all European countries. This becomes evident when
considering that all public officials in Italy are defined as insiders whenever their responsibilities allow
them to obtain inside information. This is even the case when the officials do not have a specific
relationship to a company. A counterexample of a country with a narrow insider definition is Ireland,
where a specific relationship between a public official and a company must exist for the public official
to be considered an insider. Furthermore, the Italian legislation does not differentiate between the
18
The (relative) trading frequencies for the UK, reported in Table III are consistent with the trade frequencies
reported by Fidrmuc et al. (2006).
11
penalties for primary and secondary insiders, which further indicates the wide definition of relevant
insiders (Alexander (2007)).19
Third, the ownership structure of a country might have some relevance for the trading frequency
of insiders. A country with an ownership structure that includes many publicly traded firms controlled
by the state, families, or other financial firms will consequently have a large circle of people who are
defined as insiders.20 On the other hand, countries with ownership structures that mostly consist of
widely held firms must have fewer insiders per firm and therefore less insider trading. According to
Faccio and Lang (2002), the highest proportion of widely held firms in Europe is in the U.K. (63.08%)
and Ireland (62.32%). Both countries also show the lowest average insider-trade numbers in Table III.
Finally, the trading methods carried out by some insiders explain the variation in trading
frequencies. This is especially true for Italy, where it can be observed that insiders tend to buy stocks
in several tranches within consecutive days. On the other hand, in Germany or the U.K. insiders place
their positions in single transactions on a single day.
We further examine all transactions in our sample categorized by insider position. Table IV
shows the respective descriptive statistics, in which transactions are sorted into three classes according
to the corporate position of the insider who performed the transaction. We grouped corporate positions
into insider classes based on two criteria: the day-to-day business involvement of an insider and the
ability of an insider to make strategic decisions in the company.
•
Insider class A: CEO, Deputy CEO, CFO, COO, President, chairman (also non-executive),
and similar corporate positions as well as respective family members.
•
Insider class B: Divisional/regional CEO, CEO of subsidiary, Vice President, non-executive
vice-chairman, Chief Information Officer, Chief Scientific Officer, Officer, managing
19
Primary insiders are defined as persons who obtain inside information because they are employees, large
shareholders, or the above-mentioned public officials. Secondary insiders are any persons having inside
information. For instance, a waitress who overhears a non-public conversation between two directors is already
defined as a secondary insider. It must be noted that the legal definition of insiders falls into the discussion on
illegal insider trading. However, we believe that a wide definition of insiders such as in Italy will have two
consequences. On the one hand, the reported number of trades per firm and year will be higher than in a country
that has a narrow definition of insiders. On the other hand, we assume that the information content of directors’
dealings reports will be lower in countries with a wide insider definition since less informed insiders will report
transactions with low relevance to the market.
20
Directive 2003/6/EC, art. 2 (1) (b) defines all persons who are large shareholders as insiders. Therefore, not
only persons who have a direct relationship with the company are considered as insiders but all executives of
related companies as well. It is important to note that “persons” must be understood as natural persons as well as
legal entities.
12
director, executive director, company secretary, group director, upper management, and
similar corporate positions as well as respective family members.
•
Insider class C: Non-executive board member, (non-executive) director, supervisory board
member, board of auditors, lower class executive (sales director, technical manager etc.),
upper management of subsidiaries, former CEO/executive/board member, divisional/regional
director and similar corporate positions as well as respective family members.
Panel A of Table IV shows the statistics for all transactions, while Panel B refers to large
transactions. Similar to Betzer and Theissen (2009) and Fidrmuc et al. (2006), we define large
transactions as all net purchases and sales that represent at least 0.1% of shares outstanding.21
According to Panel A, more purchases (30,878) were made by insiders than sales (14,029). Panel B
reports the same with 4,576 purchases versus 4,107 sales. However, in both panels the average mean
and median for sales is significantly larger than for purchases. These results are consistent with
previous studies (e.g. Betzer and Theissen (2009) and Fidrmuc et al. (2006)). The explanation for the
disparity between sales and purchase volumes is that insider sales are often liquidations of large
remuneration packages. Purchase transactions, however, are private investments made by the insider,
which are only fractions of these remunerations packages. According to Panel B, most active insiders
are top executives with 2,373 (1,701) purchases (sales). Panel A reports the same for purchases
(12,677); however, for sales all insider classes have about the same trading volumes.
C. Methodology
We conduct our study by separately analyzing short-term announcement effects in each single
country. To assess the information content of insider trade announcements we examine the cumulative
average abnormal returns (CAARs) of the announcement day and the subsequent day CAAR(0;1) as
well as longer event windows, CAAR(0;4), CAAR(0;20), and CAAR(-20;-1).
21
A threshold relative to a firm’s market capitalization has an obvious bias towards small-cap firms since
spending on the firm’s own shares will not rise evenly with the market capitalization of the firm. Nevertheless,
due to cross-country income inequalities and differences in spending we regard a relative threshold as being
superior over an absolute threshold.
13
To calculate the CAARs and test for their significance, we apply a standard event study
approach (MacKinlay (1997)). We define the event date as the announcement date of the transaction
and proxy the market return by the corresponding (Gross) MSCI Barra Performance Share Index for
each country. The beta is estimated over a period of 200 to 21 trading days prior to the announcement
day. We employ a 41-day event window centered on the announcement day. Similar to Fidrmuc et al.
(2006), we use three parametric and one non-parametric test statistics to examine whether CAARs are
different from zero. In particular, we apply the test statistics tCAAR based on Barber and Lyon (1997),
which is Student-t distributed with N-1 degrees of freedom. J1 and J2, based on Campbell et al. (1997).
The choice between J1 and J2 depends on the variance of the securities with higher abnormal returns. J1
is preferred whenever large abnormal returns occur in securities with high variance. J2 is preferred
whenever abnormal returns are constant across securities. Finally, we apply a non-parametric test
statistic trank based on Corrado (1989). The non-parametric test statistic as proposed by Corrado (1989)
has several advantages over parametric tests. For instance, it does not require normally distributed
abnormal returns. Furthermore, it is robust in the presence of event clustering or event-induced
increases in variance. We use a conservative approach to test the statistical significance of our results
and therefore report only the lowest absolute value of the t-statistics described above.
Moreover, we apply three other robustness checks to confirm our results and to control for
possible thin trading problems in small capitalization stocks. First, we repeat our study by using
market-adjusted returns with the respective (Gross) MSCI Barra Performance Share Index as the
benchmark index. Second, for France, Germany, Sweden and the U.K. we also calculate CAARs with
different all share indices. Specifically, the SBF250 for France, the CDAX for Germany, the OMX
Stockholm for Sweden and the FTSE all share index for the U.K. Third, we calculate CAARs from a
modified data sample that is free of event window clustering.22 In none of the modified samples
22
MacKinlay (1997) points out the importance of using non-overlapping event windows to calculate the
aggregated cumulative abnormal returns. If event windows overlap, single securities will be correlated, which
affects the variance of the aggregated cumulative returns. However, if event windows do not overlap the
covariance between securities will be zero and the variance of aggregated cumulative returns can be calculated
without any concern about the correlation of securities. The presence of event window clustering might lead to
erroneous results in parametric tests.
14
described above could we find remarkable differences to our initial results, which are presented in the
following section.23
IV.
Results
A. Cross-Country Analysis
Table V presents the results for each single country from our dataset for all (Panel A) and large
transactions (Panel B). Similar to Fidrmuc et al. (2006), we concentrate our basic univariate event
study analysis on large transactions. In general, the abnormal returns for large transactions and all
transactions are similar but larger in magnitude for large transactions. For large purchases reported in
Panel B of Table V, we find that CAARs(0;1) are positive and significantly different from zero in five
countries. Furthermore, we found significantly positive results for CAARs(0;4) in all countries besides
Austria and the Netherlands. As expected, for most countries the main price adjustments occur within
one trading week. After the fifth trading day the CAARs continue to rise, however, at a lower rate. The
highest CAARs(0;1) are reported for Ireland (5.03%) and the U.K. (6.12%). However, the results for
Ireland have to be regarded with caution since the observation number for large purchases (sales) is as
small as 35 (21). For Sweden (1.27%) and Germany (1.11%), the CAARs(0;1) are significantly lower
than for the U.K. and Ireland. The lowest significantly positive CAAR(0;1) is reported for Italy
(0.49%). For CAARs(0;4), we observe increases relative to CAARs(0;1) in each country except for
Ireland. For large sell transactions we observe significantly negative results for CAARs(0;1) and
CAARs(0;4) only in the U.K. (-0.41% and -0.88%) and Sweden (-0.82% and -1.39%). The above
results indicate clear market reactions following the announcements of insider trades. As
hypothesized, we observe positive abnormal returns after purchase announcements and negative
abnormal returns after sell announcements. Especially for Germany, Ireland, Sweden, and the U.K. we
found significant results. Due to the magnitude of these CAARs, we see our results not only as
statistically but also as economically significant. For large transactions, we found higher CAARs than
for small transactions. Thus, we conclude that transaction size indeed plays a crucial role in the size of
23
We construct the data sample that is free of event window clustering by eliminating overlapping event
windows for single securities. The results are omitted from the paper but are available upon request.
15
the announcement effects.24 Especially for the U.K, the significance of trade size seems to be essential,
since the difference between large transaction and all transaction CAARs is 4.28% for CAARs(0;1)
and 4.73% for CAARs(0;4). We assume that the results for the U.K. and Ireland are strikingly high
because investing based on directors’ dealings reports is more popular in these countries than in
Continental Europe and thus leads to herd-like market reactions after announcements. Furthermore,
our results for the U.K. reported in Panel B of Table V are higher compared to Fidrmuc et al. (2006),
who report 3.12% for CAAR(0;1) and 4.62% for CAAR(0;4). We explain these differences with our
more recent dataset and the increasing popularity of investing based on directors’ dealings reports.25 In
addition, we see the exclusion of all types of remuneration, private, and merger related transactions as
a reason for our high CAARs. We found the weakest evidence of announcement effects in countries
with French legal origin. However, Austria, which is a German legal origin country, does not show
any announcement effects, which might be due to the relatively small Austrian capital market. Another
notable observation in Table V are the results for the pre-event CAARs(-20;-1), which are generally
negative (positive) prior to purchase (sell) announcements for all countries except for Austria, Ireland,
and the Netherlands. These results demonstrate that insiders tend to make purchase (sell) transactions
after the share price has declined (increased). Thus, our univariate results confirm the general opinion
from previous research that insiders follow a contrarian investment style (Seyhun (1992), Lakonishok
and Lee (2001), Friedrich et al. (2002), Piotroski and Roulstone (2005)).
B. Transaction Size
Hypothesis 2 states that large insider transactions trigger stronger announcement effects than
smaller transactions. Our univariate result also indicates that large transactions are followed by larger
announcement effects. However, previous literature also suggests that medium-sized trades are more
informative than large trades since insiders tend to make smaller transactions, simply not to attract the
attention of other market participants.26 Moreover, trades which are very large might lead to a
24
We further investigate the connection between announcement effects and transaction size in the following
section.
25
Fidrmuc et al. (2006) examined directors’ dealings for the U.K. between 1991 and 1998.
26
Barclay and Warner (1993) also show that in an anonymous market informed insiders tend to hide behind
medium-sized trades rather than trading large block transactions. Barclay and Warner (1993) refer to this trading
16
substantial decrease in a company's free float and therefore be of minimal interest to other market
participants.27 For the U.K., Friedrich et al. (2002) show that medium-sized trades predict higher
returns than large ones. Therefore, we also calculate CAARs(0;1) and CAARs(0;4) for different
transaction sizes and examine whether medium-sized transactions generate the highest returns.
Specifically, for each country we calculate CAARs for the following net transaction size groups: (i)
transaction size < 25,000 euros, (ii) 25,000 euros ≤ transaction size < 100,000 euros, (iii) 100,000
euros ≤ transaction size < 250,000 euros, (iv) 250,000 euros ≤ transaction size < 1,000,000 euros,
and (v) 1,000,000 euros ≤ transaction size. We also perform a multivariate regression to test for
differences between the size groups. In none of the observed countries do we find a clear indication
that medium-sized trades generate higher abnormal returns than large ones. For reasons of brevity we
do not present these results.28 Generally, we conclude that (short-term) CAARs rise with the size of
the transaction. Similar to Fidrmuc et al. (2006), we find the highest CAARs whenever the trade size
surmounts 0.1% of the firm’s market capitalization. Thus, in our further study we calculate and mainly
discuss results for all transactions as well as transactions that are at least 0.1% of the firm’s market
capitalization.
C. Insider Hierarchy
Hypothesis 3 postulates that high-level executives have an information advantage over lowlevel executives. Specifically, we assume that insider transactions by high-level executives should
result in stronger announcement effects than those of low-level executives. We use two approaches to
test this hypothesis. First, we compute CAARs for all three insider classes (A to C) and compare the
results. Second, we perform a multivariate OLS regression with CAAR(0;1) as the dependent variable
and insider classes as dummy variables. Table VI reports the results for all transactions from our final
data sample. For purchase transactions, only in the U.K. does insider class A (top-level executives)
practice as "stealth trading". Since we only observe transactions which are not anonymous, the "stealth trading"
hypothesis cannot be fully connected to our study. Nevertheless, we assume that even in a not anonymous
market insiders might hide (at least to some extend) behind several medium-size trades rather than executing one
large block transaction. For further discussion on the "stealth trading" hypothesis see also Blau et al. (2009) and
Lebedeva et al. (2009).
27
See also Giamouridis et al. (2008).
28
All results are available upon request.
17
seem to trigger the highest (significant) CAARs. The differences between insider classes are relatively
small, however the CAARs show a hierarchical pattern what let us assume that insider class A is
indeed best informed in the U.K. For Sweden and Italy, we find the highest CAARs(0;1) for insider
class C. In Germany we find about the same results across all insider classes. In Ireland, the
announcement effect is largest for insider class B. In France we do find a clear hierarchal pattern for
CAAR(0;4), however, none of the results are statistically significant. Altogether, we find only
incoherent results from our univariate insider hierarchy test. We further test the hierarchy hypothesis
by performing a multivariate regression (Table VII). The OLS regression models include a dummy
variable for each insider class, where Insider class A is the reference category. Hence, a positive
coefficient for Insider class B or Insider class C indicates that the announcement effect of Insider class
A is smaller in magnitude and therefore contradicts the hierarchy hypothesis. A negative coefficient for
Insider class B or Insider class C indicates the opposite and consequently supports the hierarchy
hypothesis. In conjunction with the hierarchy hypothesis, we also test hypothesis 4, which postulates
that multiple trades by directors on the same day will give a stronger signal to the market. In
particular, we include the dummy variable Multiple trade, which equals one if more than one insider
trades in a firm on a given day, and zero otherwise. Moreover, we include other control variables in
our regression model. From the univariate results, it is apparent that (relative) transaction size is
crucial for the size of the announcement effect. Thus, we construct Transaction size, which is the
number of shares traded, divided by shares outstanding on the day of the announcement.
To control for firm size we construct the variable Firm size, which is the natural logarithm of
the number of shares outstanding multiplied by the closing price of the underlying share on the trading
day. We discuss the relation between firm size and announcement effects separately in the section
below.
We further include the variable Book to market, which is the book to market value at the
beginning of the year when the transaction took place.29 According to Lakonishok and Lee (2001),
insiders tend to purchase stocks that are cheap according to the book to market value. We also believe
29
A high book to market value (above 1) indicates that a stock is undervalued.
18
that announcement effects will be larger in undervalued than overvalued stocks. Thus, we expect a
positive relationship between book to market ratios and CAARs.
Furthermore, we include the variable Momentum, which measures the performance of shares
100 trading days prior to the transaction day. Since company insiders seem to have a contrarian
investment style, we expect a negative relationship between Momentum and post-event CAARs. We
construct Momentum by calculating the market-adjusted CAARs for 100 days prior to the insider
transaction.30
We also examine whether the frequency of trading in a specific firm has an influence on the
announcement effect. We expect a smaller announcement effect in firms with frequent insider trading
compared to firms with less insider trading. The rationale behind this is that if insiders, for instance,
trade on a monthly basis we expect the information content of these trades to be lower than for one
single trade in a year. Therefore, we construct the dummy variable Frequent trading, which is set to
one if the average trade frequency in a firm 12 months prior to a transaction is higher than the average
trade frequency of all firms in 12 months prior to the transaction in the respective country, and zero
otherwise.31 In addition, we construct two dummy variables Previous buy and Previous sell, which
control for previous purchases or sales before the respective announcement. Previous buy is set to one
if at least one (large) purchase has been announced 20 days before the respective (large transaction)
announcement, and zero otherwise. Previous sell is set to one if at least one (large) sale has been
announced 20 days before the respective (large transaction) announcement, and zero otherwise.
We also include the variable Day gap, which measures the number of days between trading and
announcement days. Due to information leakage we expect directors’ dealings reports with large
differences between transaction and announcement days to have smaller announcement effects. Thus,
we expect a negative relation between Day gap and CAARs.32
30
Given that Momentum controls for the market timing ability of insiders, it is important to note that it is
calculated relative to the trading and not the announcement day.
31
The average trade frequency per firm and country is calculated by dividing the number of all trades 12 months
prior to the transaction by the number of firms, which reported at least one director’s dealings within 12 months
prior to a transaction. For each country the dummy variable starts one year after the beginning of the observation
period for the respective country.
32
See Betzer and Theissen (2010) for a detailed analysis of reporting delays in the German market.
19
Finally, we include the dummy variable Legal change, which is set to one if the transaction has
been performed after the implementation of the Market Abuse Directive 2003/6/EC, and zero
otherwise.33 Since Ireland and the U.K. had exceptionally well-developed legal frameworks for
directors' dealings before the implementation of the Market Abuse Directive, we omit Legal change
for these countries to avoid unnecessary noise. All regression models include year dummies as well as
industry sector dummies, which we further analyze in a separate section below.
Panel A of Table VII shows the regression results for purchase transactions. In contrast to the
univariate results, we find a slight indication for insider hierarchy in France since the coefficient for
Insider class C is negative at the 10% level. For Sweden, we find a similar picture because the Insider
class B coefficient is negative at the 10% significance level. Both observations indicate that trades by
top-level executives trigger stronger market reactions than those of low-level executives in France and
mid-level executives in Sweden. Only for Ireland do we find statistically significant results for both
Insider class coefficients. However, both are positive, which indicates that top-level executives trigger
the lowest announcement effects, contradicting the hierarchy hypothesis. For the U.K. none of the
coefficients are significant, thus we cannot confirm our univariate results that top-level executives
trigger the highest CAARs. Panel B of Table VII shows regression results for sell transactions. For the
hierarchy hypothesis to hold, we expect positive signs for the Insider class coefficients. Only for
Germany we find a significantly positive coefficient for Insider class C.
Correspondent to previous studies we conclude that insider hierarchy has only a minimal
influence on the announcement effect for the countries in our sample. Only for France and Sweden do
we find tentative evidence for the insider hierarchy hypothesis. Considering that our study is based on
eight countries we do not see enough support to verify the information hierarchy hypothesis. Other
noteworthy results are the significantly positive coefficients for Ireland in Panel A, which suggest that
lower-class executives such as divisional/regional CEOs, company secretaries or group directors trade
on more valuable information than CEOs. Similar to the findings from Fidrmuc et al. (2006), we
33
For Austria and France we use the starting dates of the public announcements of directors’ dealings by the
regulatory authorities, which are reported in Table I.
20
explain these results through high-level executives being more closely observed by regulatory
authorities and therefore reluctant to trade at informative moments.34
D. Multiple Trades
The multivariate OLS regression reported in Table VII also presents a test of Hypothesis 4.
Panel A reports positive and significant coefficients for the Multiple trade dummies in Ireland, Italy,
Sweden, and the U.K. This suggests that announcements by various directors on the same day lead to
higher market reactions. Corresponding results for sell transactions are provided in Panel B. Only for
Ireland we find a significant coefficient, which, however, is positive. This reverse relation contradicts
the assumption that multiple trades by different insiders on the same day increase the announcement
effect. A possible explanation for this reverse relation is that in some companies the executives are
required to hold certain percentages of their annual cash bonuses in stocks.35 If these performance
related annual cash bonus increases or decreases simultaneously for all executives this can result in
multiple transactions by several insiders on the same day. Obviously, such transactions are
remuneration-related and only have a low informative content for outsiders. Generally, however, we
conclude that multiple trades by several directors on the same day lead to higher announcement
effects.
E. Firm Size
Hypothesis 5 postulates that firm size has a reverse influence on the announcement effect. Panel
A of Table VII shows significantly negative coefficients at the 1% level for Firm size for Germany,
Sweden, and the U.K. These results clearly show that firm size is an important determinant for
announcement effects after purchases in these countries. Considering that all of these countries show
announcement effects (see Table V) and have relatively large and developed capital markets it is
somehow surprising that other countries with large capital markets such as France or Italy do not show
34
Fidrmuc et al. (2006) find that large purchase transactions by CEOs trigger smaller announcement effects than
large transactions by other executives. Similar to Fidrmuc et al. (2006), we also find significantly positive
Insider class B coefficients for the U.K. after performing the multivariate regression on the large transactions
sample.
35
An example of a company which requires executives to invest certain percentages of their annual cash bonuses
in the company's stocks is BT Group Plc (cf. BT Group’s annual report of 2009).
21
any (statistically significant) firm size effects. Overall, we expected a more uniform relation between
firm size and announcement effects. For purchase transactions, for instance, none of the French law
countries showed firm size effects. Thus, we conclude that firm size is an important determinant for
the announcement effect, which however greatly depends on the country.
F. Legal Change
Panel A of Table VII reports significantly positive Legal change coefficients for Sweden and
the Netherlands. This indicates that improved reporting standards had a positive impact on the
announcement effect in both countries. After the implementation of the Market Abuse Directive the
contents of directors' dealings reports improved noticeably in both countries. Specifically, directors'
dealings reports became more detailed with regard to the insider name, position and transaction type.
This leads to the conclusion that an increase in information on specific transactions and better
reporting will enhance investing based on directors' dealings and thus lead to stronger announcement
effects. Panel B reports significantly negative results for Legal change in France, which also indicates
a stronger announcement effect. For Austria, Germany and Italy we do not obtain any significant
coefficients for Legal change. Since Austria generally does not show any announcement effects this is
not surprising. For Germany we explain this with the early implementation of the Market Abuse
Directive in October 2004, which is almost at the beginning of our entire observation period. Italy, on
the other hand is a unique case. It had relative good reporting standards already before the
implementation of the Market Abuse Directive, however, regulations were largely ignored and
violations not prosecuted.36 The transition process to an efficient prosecution takes a lot longer than
implementation of better reporting standards in already well-functioning legal systems. This is because
court cases for instance can take up to several years. In Italy the transition process to an improved
legal system, similar to the well-functioning systems in the U.K., Sweden or Germany is also sneaking
and thus no noticeable changes in announcement effects are visible in the short-run.
36
See also Bajo et al. (2006).
22
G. Explaining Cross-Country Differences
Considering our overall results, we conclude that announcement effects exist but vary greatly in
size across countries. There are several possible explanations as to why some countries show
substantial announcement effects and others do not. Previous studies suggest that the legal origin, as
categorized by La Porta et al. (1998), plays an important role in explaining cross-country differences
for insider trading profitability.37 Aussenegg and Ranzi (2008), for instance, compare short-term
market reactions between countries of French and German legal origin. By grouping countries
according to the legal origin, the authors implicitly assume that the legal origin must be relevant in
explaining announcement effects after insider trading. Our findings also indicate that the legal origin
partially explains cross-country differences. English law countries (U.K. and Ireland) show the
strongest market reactions. On the other hand, French law countries (France, Italy, and the
Netherlands) collectively show the smallest reactions to insider trades. Sweden, which is the only
Scandinavian law country in our dataset, shows moderate results. For German law countries (Germany
and Austria) we obtain ambivalent results, whereby it is noteworthy that Austria has a relatively small
capital market and exploiting insider trade announcements might be a rather uncommon practice. In
addition to the legal origin, Fidrmuc et al. (2010) suggest that several country-specific corporate
governance measures explain the differences in market reactions to directors’ dealings. As corporate
governance measures Fidrmuc et al. (2010) use (among others) the legal origin described above and
the legal protection of minority shareholders against self-dealing by corporate insiders. They find
stronger market reactions to purchases in countries with good corporate governance. However, for
sales they find weaker reactions in countries with good corporate governance. Our results are in line
with the explanation provided by Fidrmuc et al. (2010) because we report substantially higher
abnormal returns for Ireland and the U.K. Both countries are common law countries, which are known
to have stronger corporate governance regulations than civil law countries. Moreover, we assume that
technical issues such as the accessibility of directors’ dealings reports by the public play a crucial role
in explaining cross-country differences. According to the Market Abuse and Transparency Directive
37
La Porta et al. (1998) categorizes countries based on the legal protections of shareholders (investors). He
concludes that English (common) law countries generally have the strongest investor protection, Germany and
Scandinavian law countries moderate investor protection, and French law countries the worst investor protection.
23
companies announcing directors’ dealings have to fulfill certain quality standards regarding the timely
accessibility of the reports by the public.38 However, both directives have been implemented by each
European member state in a different fashion, which is reflected in the quality of directors’ dealings
reporting. The U.K., Ireland and Germany for instance have well-organized and efficient reporting
systems. Directors’ dealings reports are accessible for the public in a timely manner through the
London Stock Exchange internet page in the U.K. or adhoc news portals in Germany such as the
DGAP internet page.39 Moreover, the investor relations in these countries are often well informed in
the case of queries regarding directors’ dealings reports. In contrast, for Austria, France and the
Netherlands the reporting standards are lower and directors’ dealings reports are substantially harder to
obtain in a timely manner. We find substantial reporting delays in these countries even for transactions
performed after the implementation of the Market Abuse Directive. Specifically, the mean reporting
delay is ten (calendar) days for Austria, nine days for France, seven days for the Netherlands, four
days for Italy, Germany and Sweden, one day for Ireland and the U.K. For the period after the
implementation of the Transparency Directive (see Table I) we see an increase in reporting speed in
almost each country, however, the reporting delays are still relatively high for some countries.
Specifically, nine (calendar) days for France, eight days for Austria, four days for Italy and the
Netherlands. The lower reporting standards in these countries become more evident when one
considers that most companies in Europe report directors’ dealings not only on an officially appointed
central storage internet page (as required by the Transparency Directive) but also on the company’s
website. In France, the officially appointed central storage internet page is the “Autorité des marchés
financier” internet page, which displays directors’ dealings with delays of at least one day after they
have been reported on a company’s website. We observe similar delays for transactions announced on
38
Directive 2004/109/EC, requires the Member State to ensure that there is at least one officially appointed
mechanism for the central storage of regulated information. These mechanisms should comply with minimum
quality standards of security, certainty as to the information source, time recording, and easy access by end users.
(Article 21 & 22)
39
In the U.K. all transactions are reported in a timely manner on the LSE internet page:
http://www.londonstockexchange.com/exchange/prices-and-news/news/market-news/market-news-home.html,
After the implementation of the Transparency Directive in Germany about 90% percent of all transactions are
reported on the http://www.dgap.de; and http://www.euroadhoc.de.
24
the Austrian as well as the Dutch central storage internet pages.40 For some transactions we observed
delays of as many as ten trading days after they have been reported on a company’s webpage. On the
other hand, in Germany directors’ dealings are reported almost simultaneously on the publicly
available DGAP internet page and a company’s website. The difference in reporting quality can be
also observed in cross-listed companies, which report the same transactions in different countries. For
instance, while the same transaction is reported on the trading day in Germany, it might take up to four
days until this transaction is reported in the Netherlands.41 A substantially delayed reporting in the
central source of information for directors’ dealings makes the exploitation of insider trades by
outsiders difficult since they must monitor several news portals and company’s website
simultaneously or pay costly data vendors to get the most current data on directors’ dealings. Thus, our
results indicate that timely and publicly available reporting as proposed by the Market Abuse and
Transparency Directive, plays a crucial role in explaining cross-country differences.
H. Industry Sector Analysis
Hauser and Vermeersch (2002) point out the increasing importance of sector diversification for
stock selection. We therefore switch our focus to sectors and assess Hypothesis 6. To test whether
announcement effects are larger in certain sectors we first group all CAARs into eight sectors across
all countries and compare the results.42 Sector categorization is provided by Compustat. To achieve
sufficient sample sizes, we merge “Information Technology” and “Telecom” to “IT”, as well as
“Energy” and “Utilities” to “Energy”. Second, we perform a multivariate regression with sectors as
dummy variables in a similar fashion as we have done above. Since we believe that healthcare is the
most R&D-intensive sector we use this sector as the base category. Table VIII presents the univariate
results for each sector. The results for CAAR(0,1), show the largest announcement effects in the
healthcare, energy and IT sectors, whereas the consumer, financials, and materials sectors show the
40
Austria: http://www.fma.gv.at/cms/site/EN/index.html, France: http://www.amf-france.org/, the Netherlands:
http://www.afm.nl/en.aspx.
41
Examples of companies which are subject to the above described reporting delays are Adecco S.A., which
reports in France, the U.K. and Switzerland; Qiagen N.V., which reports in the Netherlands and Germany;
conwert Immobilien Invest S.E., which reports in Austria.
42
We are aware that measures such as R&D expenses to sales would better describe the R&D intensity of firms.
However, due to limited data availability we identify R&D-intensive firms based on the industry sector.
25
smallest announcement effects. These observations are in line with our assumption that announcement
effects are largest in R&D-intensive sectors. For the energy sector we see two reasons for the high
abnormal returns. First, due to the worldwide increase in demand for products, specifically oil, from
the energy sector during our observation period, the stocks in this sector have generally performed
exceptionally well. Second, because of the simple structure of these products (e.g. oil, gas) and their
strong correlation to the overall performance of the energy sector, we believe that the predictability of
(long-term) price changes is relatively simple for anybody who might have even a small information
advantage.43 Thus the market is, in particular, sensitive to purchase or sales signals from insiders in
this sector, which is reflected in the large announcement effects. To confirm our univariate results we
perform the same multivariate regression as above but on the entire European data sample by
including country dummy variables. The results are presented in Table IX. For purchase transactions,
we find that all sector dummies have a negative coefficient, which suggests that announcement effects
are indeed higher in the healthcare sector. However, for Energy the coefficient is not statistically
different from zero what confirms our univariate results. For IT the coefficient is statically different
from zero at the 5% significance level, which, however, is low compared to the other remaining sector
dummies which are significant at the 1% level. Altogether, we conclude that the exploitation of
directors’ dealings announcements seem to be most worthwhile in the energy, healthcare and to some
extent in the IT sectors.
V.
Conclusion
In this paper, we examine whether announcements of directors’ dealing reports are informative
for outside investors in a broad selection of European countries. We use similar observation periods,
similarly structured data samples, and apply analogous testing methods for each country. The data is
adjusted for transactions that follow or precede mergers, capital increases, remunerations, and other
effects that might distort the examination of the announcement effect. We test each country for several
determinants that are known from previous literature to influence announcement effects.
43
See also Brevik and Kind (2004) who investigate the main determinates for the price formation of oil.
26
We find substantial announcement effects for purchases in Germany, Sweden, Ireland, and the
U.K. The announcement effects are largest for the U.K. and Ireland. Our results confirm findings from
previous literature that sales have lower information content than purchases. This is because insiders
have many motives for selling their company’s stocks, such as for liquidity reasons or portfolio
diversification, whereas they have only one motive for purchasing stocks, which is to earn returns on
an investment. Furthermore, reactions in the markets are stronger after large trade announcements than
after small trade announcements. This is due to the higher signaling effect of large trades compared to
small trades. In most countries top-level executives do not trigger the strongest announcement effects.
Only for France and Sweden do we find tentative evidence of an insider hierarchy. These results are in
line with previous studies but nevertheless surprising since top-level executives are expected to be best
informed about the value of their company’s assets. A possible explanation is that top insiders are
closely watched by regulatory authorities and news media and do not want to attract attention by
earning large profits with their company’s stocks. This is especially evident for Ireland, where lowlevel executives trigger stronger announcement effects than top-level executives. Finally, we find that
directors’ dealings announcements lead to highest abnormal returns in the R&D-intensive sector
healthcare as well as the energy sector.
Overall, our paper reveals that directors’ dealings are informative in European stock markets.
Our results imply that under certain conditions outside investors can profit noticeably from insider
trade announcements. However, we do not regard our results as fully detached from market efficiency.
For countries with the strongest announcement returns such as Germany, Sweden, and the U.K., the
abnormal returns are substantially larger when the insider transactions are made in small firms. This,
however, shows that the profitability of insider transactions cannot be taken for granted, since smallcap stocks are less liquid and have higher bid-ask spreads. Nevertheless, due to the magnitude of our
results we are still confident that correctly filtered directors’ dealings give valuable information for
stock selection and analysis. The recently implemented E.U. directives 2003/6/EC and 2004/109/EC,
set the path for faster and better reporting of directors' dealings across all European member states.
Despite these efforts by the E.U. Commission to harmonize European Capital markets we still found
significant differences in reporting standards, quality and consequently short-term announcement
27
effects in most countries from our data sample. Generally, we found that countries which have
accurately translated the directives into their regulatory framework show stronger short-term
announcement effects than countries, which rather neglect strict implementation of the directives. This
gives strong reason to believe that the directives imposed by the E.U. Commission indeed lead to more
informative directors' dealings reports combined with faster price adjustments and thus to more
efficient markets. It is, however, up to each single member state to translate these directives carefully
into its law and accurately prosecute any violations. Our results strongly indicate that these efforts
should be taken upon by each member state. After all, the reward could be a more competitive and
efficient European financial market, at least with respect to directors' dealings disclosures.
28
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31
Table I
European Regulations on Directors’ Dealings
This table gives an overview on the implementation dates of the Market Abuse Directive 2003/6/EC (MAD) and the Transparency Directive 2004/109/EC (TD) in each country. Legal origin, as
categorized by La Porta et al. (1998).
Country
(legal origin)
Date of major legal change within observation period.
MAD
TD
Austria
(German)
Before the implementation of the MAD, there was no public disclosure of dd's. In May-05, the regulatory
authority started to publicly announce dd's on its website.
Jan-05
Apr-07
France
(French)
Before the implementation of the MAD, there was no public disclosure of dd's. In Mar-06, the regulatory
authority started to publicly announce dd's on its website.
Jul-05
Germany
(German)
Before the implementation of the MAD, dd's had to be reported "without delay". The regulatory authority,
however, did not explicitly define what "without delay" means, which resulted in substantial reporting
delays (see also Betzer and Theissen (2010)). After the implementation of the MAD the reporting of dd's
improved significantly, however, some companies still reported dd's only on their web pages or in the
newspaper. After the implementation of the TD companies are required to report via ad-hoc newsportals
such as www.dgap.de, www.euroadhoc.de or www.hugingroup.com.
Oct-04
Jan-07
Bundesanstalt für
§ 15a WpHG
Finanzdienstleistungsaufsicht
(BaFin)
Ireland
(English)
Ireland's legal framework is primarily governed by the Companies Law which is adopted from the U. K.
Therefore, similar to the U.K., Ireland had an effective regulatory framework for dd's prior to the
implementation of the MAD and the TD. Thus, both directives led to unnoticeable changes in dd's disclosure
requirements.
Oct-05
Jun-07
Irish Financial Services
Regulatory Authority
(Financial Regulator)
Italy
(French)
Compared to other Continental European countries, Italy had a well established regulatory framework before May-05 Dec-08 first part/ Commissione Nazionale per
Aug-09 final
le Società e la Borsa
the implementation of the MAD and TD. For instance, dd's had to be reported to the regulator within five
(CONSOB)
business days. However, most regulations were largely ignored and violations remained without sanctions
(see also Bajo et al. (2005)).
Article 114 and article 193 Testo
Unico della Finanza e gli /
Article 152-sexies e seguenti del
Regolamento Emittenti Consob
Netherlands
(French)
Before the implementation of the MAD, dd's had to be reported before the 10th day of the month subsequent
to the transaction. After the implementation of the MAD, dd's reporting standards improved by providing
more details on the insider position and transaction type in dd's reports.
Oct-05
Wte 1995 – Art. 47a
Sweden had an effective regulatory framework for dd's prior to the implementation of the MAD. However,
Sweden
(Scandinavian) the new regulatory framework further restricted dd's by imposing a one-month trading gap prior to final and
interim earnings announcements. After the implementation of the MAD, dd's reporting standards further
improved by providing more details on the insider position and transaction type in dd's reports.
Jul-05
Jul-07
Finansinspektionen
(FI)
Market Abuse Penal Act
(2005:377)/
Swedish Companies Act
(2005:551)
The U.K. had an effective regulatory framework for dd's prior to the implementation of the MAD/ TD,
which included a maximum reporting period of five business days and a two-month trading gap prior to final
and interim earnings announcements.
Jul-05
Jan-07
Financial Services Authority
(FSA)
Company Securities Act 1985/
Financial Services and Markets
Act 2000
U. K.
(English)
32
Regulatory
authority
Finanzmarktaufsicht
(FMA)
Sep-06 first part/ Autorité des marchés
Dec-07 final
financiers (AMF)
Jan-07 first part/ Autoriteit Financiële
Jan-09 final Markten
(AFM)
Acts/Laws regulating
Directors' Dealings
§ 48 d Abs. 4 BörseG/
§ 82 Abs. 8 BörseG
Article 621-18-2 Code
monétaire et financier/ Article
223-22 - 223-26 du règlement
général de l’AMF
Companies Act (1990) - Part IV
Table II
Summary Statistics for Final Data Sample
This table shows the final data sample for all (net) insider purchases, sales between 01/2003 and 12/2009. The final
observation number is 44,907, which represents 29.52% of the original data sample.
Country
Austria
France
Germany
Ireland
Italy
Netherlands
Sweden
U.K.
Total
2003
2004
2005
2006
2007
2008
2009
Purchases
6
3
36
40
225
284
119
Sales
4
6
49
29
73
37
40
Purchases
0
2
101
317
630
989
599
Sales
0
4
335
527
770
267
350
Purchases
221
224
450
721
1039
1904
632
Sales
235
383
651
590
421
165
246
Purchases
0
0
27
53
98
127
32
Sales
1
1
10
12
18
12
18
Purchases
64
63
248
734
1400
2020
838
Sales
44
84
218
733
510
254
258
Purchases
23
26
30
69
170
195
67
Sales
49
67
70
100
184
39
62
Purchases
0
832
982
1279
1569
1543
977
Sales
0
579
734
814
667
411
400
Purchases
365
363
621
1109
2309
2645
1458
Sales
127
115
282
604
664
323
383
1,139
2,752
4,844
7,731
10,747
11,215
6,479
33
Table III
Summary Statistics for European Insider Trades
This table shows all (net) insider purchases, sales, option related sales and exercises between 01/2003 and 12/2009. No. of
trades per firm/year is the average number of insider trades per firm and year. % Market capitalization is the average
percentage of the firm’s capitalization which is traded by insiders per firm and year. Market capitalization is calculated as
shares outstanding multiplied with the closing price of the underlying share on the trading day.
Sales &
Option
related
Sales
Exercises
All
Purchases
Sales
Option
related
Sales
5.10
1.08%
3.32
0.62%
1.24
0.62%
0.16
0.11%
1.40
0.64%
0.38
0.23%
75
70
54
6
54
14
4.41
0.90%
1.94
0.36%
1.58
0.73%
0.46
0.08%
2.04
0.72%
0.42
0.28%
507
398
366
130
384
136
3.60
1.67%
2.07
1.67%
1.09
1.39%
0.18
0.10%
1.26
1.38%
0.27
0.26%
573
499
431
79
439
122
3.85
0.59%
2.27
0.26%
0.54
0.43%
0.57
0.11%
1.11
0.46%
0.47
0.05%
43
40
28
21
31
16
8.54
1.61%
5.14
0.56%
2.06
1.17%
0.83
0.12%
2.88
1.19%
0.52
0.44%
284
252
232
82
237
75
6.33
1.24%
1.90
0.45%
1.52
0.80%
1.39
0.10%
2.90
0.75%
1.53
0.39%
126
110
88
70
103
76
7.23
2.69%
4.78
1.66%
2.34
1.15%
0.09
0.04%
2.44
1.15%
0.01
2.14%
328
315
306
41
307
2
No. of trades per firm/year
% Market capitalization
3.72
0.48%
1.93
0.25%
0.53
0.35%
0.76
0.11%
1.28
0.37%
0.51
0.12%
Number of firms
1316
1213
628
471
736
481
Austria
No. of trades per firm/year
% Market capitalization
Number of firms
France
No. of trades per firm/year
% Market capitalization
Number of firms
Germany
No. of trades per firm/year
% Market capitalization
Number of firms
Ireland
No. of trades per firm/year
% Market capitalization
Number of firms
Italy
No. of trades per firm/year
% Market capitalization
Number of firms
Netherlands
No. of trades per firm/year
% Market capitalization
Number of firms
Sweden
No. of trades per firm/year
% Market capitalization
Number of firms
UK
34
Table IV
Summary Statistics for European Insider Trades by Insider Class
This table shows (net) purchases and sales by insiders in Austria, France, Germany, Ireland, Italy, the Netherlands, Sweden,
and the U.K. between 01/2003 and 12/2009. Large transactions are (net) purchases and sales that are larger than 0.1% of the
firms’ market capitalization. Trade value is the total volume in euros traded by all insiders across the entire sample. %
Market capitalization (total) is the total volume traded as a percentage of the firms’ market capitalization across all firms.
Insiders are classified into the following three classes.
Insider class A: CEO, Deputy CEO, CFO, COO, President, chairman (also non-executive), and similar corporate positions as
well as respective family members.
Insider class B: Divisional/regional CEO, CEO of subsidiary, Vice President, non-executive vice-chairman, Chief
Information Officer, Chief Scientific Officer, Officer, managing director, executive director, company secretary, group
director, upper management, and similar corporate positions as well as respective family members.
Insider class C: Non-executive board member, (non-executive) director, supervisory board member, board of auditors, lower
class executive (sales director, technical manager etc.), upper management of subsidiaries, former CEO/executive/board
member, divisional/regional director and similar corporate positions as well as respective family members.
Panel A: All Transactions
N
30878
Net purchases
Trade value (€'000)
% Market capitalization (total)
% Market capitalization by insiderclass
Mean
Median
Minimum
Maximum
407
27
1.00
600,000
0.12%
0.01%
0.00%
43.66%
Insider class A
Insider class B
12,677
7,678
0.12%
0.08%
0.02%
0.01%
0.00%
0.00%
23.09%
43.05%
Insider class C
10,523
0.15%
0.01%
0.00%
43.66%
Net Sales
Trade value (€'000)
14029
% Market capitalization (total)
% Market capitalization by insiderclass
1,469
96
1.00
2,510,000
0.44%
0.03%
0.00%
72.28%
Insider class A
Insider class B
4,240
5,291
0.59%
0.32%
0.06%
0.02%
0.00%
0.00%
72.28%
69.61%
Insider class C
4,498
0.42%
0.03%
0.00%
65.67%
Median
Minimum
Maximum
Panel B: Large Transactions (> 0.1%*Mcap)
N
4576
Net purchases
Trade value (€'000)
% Market capitalization (total)
% Market capitalization by insiderclass
Mean
2,199
166
1.22
600,000
0.71%
0.24%
0.10%
43.66%
Insider class A
Insider class B
2,373
605
0.55%
0.88%
0.22%
0.22%
0.10%
0.10%
23.09%
43.05%
Insider class C
1,598
0.88%
0.27%
0.10%
43.66%
Net Sales
Trade value (€'000)
4107
% Market capitalization (total)
% Market capitalization by insiderclass
4,381
460
1.77
2,510,000
1.43%
0.37%
0.10%
72.28%
Insider class A
Insider class B
1,701
1,105
1.43%
1.47%
0.41%
0.33%
0.10%
0.10%
72.28%
69.61%
Insider class C
1,301
1.41%
0.36%
0.10%
65.67%
35
Table V
Cumulative Abnormal Returns for Insider Trades by Country
This table reports the CAARs for directors’ trades between 01/2003 and 12/2009. t-statistic is the lowest absolute value of all
four test statistics applied for each CAAR and Observation (tCAAR, trank, J1, J2). Large transactions are (net) purchases and
sales that are larger than 0.1% of the firms’ market capitalization. All CAARs have been computed in an event-study
framework as proposed by MacKinlay (1997). An estimation window of 180 trading days and an observation window of 41
days centered on the announcement day have been used. The market return is approximated by the corresponding (Gross)
MSCI Barra Performance Share Index for each single country.
Panel A: All Transactions
Country
N
Purchases
CAAR
t-statistic
Sales
CAAR
t-statistic
Purchases
France
CAAR
t-statistic
Sales
CAAR
t-statistic
Germany Purchases
CAAR
t-statistic
Sales
CAAR
t-statistic
Purchases
Ireland
CAAR
t-statistic
Sales
CAAR
t-statistic
Purchases
Italy
CAAR
t-statistic
Sales
CAAR
t-statistic
Netherl. Purchases
CAAR
t-statistic
Sales
CAAR
t-statistic
Purchases
Sweden
CAAR
t-statistic
Sales
CAAR
t-statistic
Purchases
U. K.
CAAR
t-statistic
Sales
CAAR
t-statistic
Austria
Panel B: Large Transactions (> 0.1%*Mcap)
CAAR
(0;1)
CAAR
(0;4)
CAAR
(-20;-1)
CAAR
(0;20)
0.00%
0.00
0.45%
1.30
-0.39%
-0.56
2.63%
2.79
0.64%
-0.85
1.14%
0.18
-0.62%
-0.48
-2.02%
-0.97
0.10%
0.88
0.17%
0.59
-1.37%
-3.76
1.34%
2.64
-0.22%
-2.35
-0.51%
-3.05
1.55%
5.85
-1.37%
-3.15
0.58%
4.20
1.23%
5.75
-3.74%
-7.64
2.39%
6.56
-0.44%
-2.55
-0.97%
-2.69
2.39%
6.48
-3.22%
-4.40
1.56%
3.56
1.70%
2.32
-3.04%
-2.05
1.52%
0.44
-0.24%
-0.38
-0.80%
-1.09
-1.02%
-0.04
-4.31%
-1.72
0.22%
2.05
0.52%
3.00
-2.84%
-8.89
1.05%
3.38
-0.28%
-2.62
-0.59%
-3.50
2.28%
6.39
-2.00%
-4.58
0.41%
2.64
0.31%
1.13
-0.93%
-0.63
0.42%
0.99
-0.34%
-1.64
-0.13%
-0.47
-0.41%
-0.23
-0.50%
-0.26
0.27%
4.33
0.53%
4.87
-1.44%
-3.82
0.83%
5.12
-0.43%
-3.83
-0.81%
-3.74
1.48%
6.00
-2.60%
-5.42
1.84%
8.29
2.48%
7.76
-4.53%
-6.86
3.89%
5.73
-0.35%
-2.80
-0.72%
-3.49
2.49%
8.45
-2.31%
-4.47
N
CAAR CAAR CAAR
(0;1)
(0;4) (-20;-1)
CAAR
(0;20)
0.80%
1.09
1.97%
-0.09
4.63%
2.02
6.32%
3.39
1.45%
-0.35
0.34%
-0.41
-1.11%
-0.51
-6.27%
-2.95
0.36%
1.49
1.16%
3.71
-0.19%
-0.31
2.94%
4.77
-0.18% -0.49%
-0.55
-1.39
2.81%
3.73
-1.53%
-2.07
1.11%
4.86
1.75%
5.51
-2.02%
-3.19
2.75%
4.88
-0.68% -1.45%
-2.19
-1.82
3.15%
4.95
-4.15%
-3.59
5.03%
2.87
4.52%
1.52
2.73%
0.70
6.91%
1.72
-1.32% -3.04%
-0.77
-2.01
0.76%
0.23
-9.05%
-2.44
0.49%
2.52
0.63%
2.47
-0.76%
-1.31
1.06%
1.04
-0.33% -0.34%
-1.12
-0.75
3.67%
2.82
-0.99%
-1.33
1.17%
1.54
1.89%
1.70
3.66%
1.33
1.87%
0.82
-0.67%
-0.63
1.09%
1.11
-4.12%
-2.23
-0.55%
-0.20
1.27%
7.48
1.75%
6.59
-0.06%
-0.12
1.48%
3.17
-0.82% -1.39%
-4.23
-3.80
1.05%
1.76
-3.15%
-3.54
6.12%
10.63
-4.74% 11.22%
-2.95
6.71
130
713
238
75
2,638
517
2,253
581
5,191
1,170
2,691
1,137
337
35
21
72
5,367
603
2,101
486
580
46
571
118
7,182
1,006
3,605
995
8,870
1,069
2,498
7.21%
8.12
694
36
-0.41% -0.88%
-2.65
-2.62
2.48%
5.34
-2.67%
-2.76
Table VI
CAARs (0;1)/ (0;4) for Large Insider Trades by Insider Class
This table reports the cumulative abnormal returns of all transactions by insider class (for detailed description of insider classes see Table IV). t-statistic is the lowest absolute value of all four test
statistics applied for each CAAR and Observation (tCAAR, trank, J1, J2).
N
Purchases
Insiderclass A
t-statistic
Insiderclass B
t-statistic
Insiderclass C
t-statistic
Sales
Insiderclass A
t-statistic
Insiderclass B
t-statistic
Insiderclass C
t-statistic
Purchases
Insiderclass A
t-statistic
Insiderclass B
t-statistic
Insiderclass C
t-statistic
Sales
Insiderclass A
t-statistic
Insiderclass B
t-statistic
Insiderclass C
t-statistic
CAAR
(0;1)
CAAR
(0;4)
N
CAAR
(0;1)
Austria
329
247
137
76
113
49
1362
1577
628
771
702
N
CAAR
(0;1)
France
0.07%
0.16
-0.49%
0.02
0.72%
0.99
0.88%
1.57
0.01%
0.02
0.21%
0.33
1639
3.08%
1.50
-0.61%
-1.97
-0.24%
-0.13
5.82%
0.33
-0.77%
-1.07
-1.72%
-1.39
1049
0.15%
1.28
0.22%
1.36
0.34%
2.65
0.54%
2.87
0.49%
1.89
0.53%
2.85
228
-0.32%
-1.92
-0.44%
-2.34
-0.07%
-0.36
-0.93%
-3.34
-0.64%
-2.03
-0.24%
-0.97
216
783
608
596
Italy
2428
CAAR
(0;4)
235
117
169
203
199
N
CAAR
(0;1)
Germany
0.18%
1.68
0.26%
0.97
-0.13%
-0.36
0.41%
1.78
-0.04%
-0.10
-0.28%
0.33
-0.24%
-2.40
-0.13%
-1.00
-0.27%
-1.02
-0.51%
-3.06
-0.42%
-1.91
-0.60%
-1.34
Netherlands
0.43%
0.19%
1.78
0.48
0.39%
0.15%
1.49
0.43
0.40%
0.89%
1.32
1.89
-0.30%
0.03
-0.14%
-0.57
-0.60%
-1.90
CAAR
(0;4)
0.11%
0.16
-0.27%
-0.66
-0.18%
-0.09
37
2759
1347
1085
955
872
864
Ireland
0.63%
4.26
0.44%
2.48
0.63%
3.29
1.25%
5.42
1.34%
4.59
1.02%
3.78
-0.70%
-2.52
-0.41%
-1.99
-0.20%
-1.08
-1.38%
-2.96
-0.81%
-1.66
-0.69%
-1.23
130
45
162
22
33
17
1.61%
2.67
1.92%
1.52
1.41%
2.59
2.30%
2.42
3.31%
2.01
0.77%
0.49
-0.67%
-0.60
-0.53%
-0.67
0.87%
0.76
-1.26%
-0.76
-1.48%
-1.49
1.10%
0.68
Sweden
1172
2845
3165
485
1692
1428
CAAR
(0;4)
U.K.
0.33%
3.07
0.03%
0.24
0.47%
6.40
0.74%
4.16
0.22%
1.12
0.74%
6.26
-0.56%
-2.29
-0.39%
-2.72
-0.43%
-3.24
-1.01%
-2.79
-0.74%
-2.36
-0.83%
-3.13
3992
1381
3497
856
999
643
2.21%
8.35
1.95%
5.60
1.39%
7.82
2.90%
7.81
2.48%
5.24
2.00%
7.33
-0.36%
-2.19
-0.26%
-1.84
-0.47%
-2.41
-0.74%
-2.89
-0.65%
-2.30
-0.80%
-2.81
Table VII
Market Reaction to European Insider Trades by Country
This table shows multivariate OLS regressions with CAAR(0;1) as the dependent variable. Insiders are categorized into three
groups (for detailed categorization see Table IV): Insider class A (top-level executives), Insider class B (mid-level
executives), Insider class C (low-level and non-executives). Insider class A is the base category. Sector dummy variables are
categorized as follows: Healthcare, Energy, Industrials, Consumer Discretionary, Consumer Staples, Financials, IT.
Healthcare is the base category. Multiple trade is set to one if more than one insider of a company trades on the same day.
Transaction size is the relative size of a transaction based on the shares outstanding on the trading day. Firm size is calculated
as the natural logarithm of the shares outstanding multiplied by the closing price of the underlying share on the trading day.
Momentum measures the performance of shares 100 trading days prior to the transaction day. Book to market is the book to
market value at the beginning of the year when the transaction took place. Frequent trading is set to one if the average trade
frequency in the respective firm is higher than the average trade frequency of all firms in the respective country. Previous buy
(Previous sell) is set to one if there has been at least one purchase (sale) announcement 20 days before the respective
announcement, and zero otherwise. Day gap is the difference (in business days) between trade and announcement day. Legal
change, is set to one if the transaction has been performed after the implementation of the Market Abuse Directive
2003/6/EC, and zero otherwise. All models include year dummies. Standard errors are adjusted for heteroscedasticity and tstatistics are reported in parentheses. *,**,*** indicate significance at the 10, 5, and 1% level, respectively.
-0.0181
(-1.101)
IT
-0.0028
(-0.260)
Multiple trade
-0.0054
(-0.882)
Transaction size 0.3199
(1.523)
Firm size
0.0009
(0.449)
Momentum
-0.0204
(-1.111)
Book to market 0.0030
(0.561)
Frequent trading 0.0012
(0.182)
Previous buy
-0.0014
(-0.282)
Previous sell
0.0045
(0.297)
Day gap
0.0005
(0.917)
Legal change
-0.0139
(-1.157)
Constant
-0.0202
(-0.467)
France
0.0009
(0.348)
-0.0034**
(-2.044)
0.0108
(1.014)
-0.0003
(-0.083)
-0.0048*
(-1.679)
-0.0054*
(-1.933)
-0.0022
(-0.669)
-0.0072**
(-2.544)
-0.0036
(-1.254)
-0.0015
(-0.741)
-0.0381
(-0.662)
0.0004
(1.049)
-0.0091*
(-1.758)
0.0037***
(4.902)
-0.0014
(-0.847)
0.0032*
(1.904)
0.0002
(0.050)
0.0001
(0.591)
-0.0065
(-1.593)
-0.0052
(-0.435)
Panel A: All Purchases
Germany
Ireland
Italy
-0.0012
0.0264***
0.0012
(-0.612)
(2.779)
(0.922)
0.0013
0.0202***
0.0011
(0.612)
(3.178)
(0.922)
0.0226*** 0.0513**
-0.0016
(3.293)
(2.190)
(-0.467)
-0.0013
-0.0094
-0.0024
(-0.294)
(-0.522)
(-0.623)
-0.0046
0.0023
-0.0017
(-1.419)
(0.143)
(-0.541)
-0.0045
0.0364**
0.0029
(-1.311)
(2.346)
(0.934)
0.0017
0.0068
-0.0023
(0.350)
(0.446)
(-0.560)
-0.0039
0.0048
0.0013
(-1.074)
(0.324)
(0.444)
-0.0050
0.0270
-0.0030
(-1.463)
(1.096)
(-0.883)
-0.0018
0.0232***
0.0040***
(-0.818)
(3.863)
(2.894)
0.2909*** 12.3832*** 0.0486
(2.632)
(3.571)
(0.849)
-0.0026*** 0.0028
-0.0003
(-5.306)
(0.995)
(-0.675)
-0.0160*** -0.0239*
-0.0112***
(-3.710)
(-1.770)
(-2.933)
0.0044*** 0.0061
-0.0007
(2.918)
(1.282)
(-0.646)
-0.0011
0.0036
-0.0022*
(-0.572)
(0.557)
(-1.743)
0.0002
0.0063
0.0002
(0.094)
(0.974)
(0.125)
-0.0015
0.0136
0.0001
(-0.351)
(0.702)
(0.018)
-0.0002
-0.0045*** -0.0004**
(-1.057)
(-2.837)
(-2.456)
-0.0031
0.0010
(-0.318)
(0.376)
0.0532*** -0.0851
0.0084
(4.485)
(-1.327)
(0.882)
Netherl.
-0.0004
(-0.098)
-0.0042
(-0.692)
0.0196***
(3.137)
-0.0081
(-1.122)
-0.0004
(-0.083)
0.0050
(0.683)
-0.0058
(-1.230)
-0.0019
(-0.523)
0.0120*
(1.777)
0.0005
(0.183)
0.1451
(0.700)
0.0000
(0.035)
-0.0051
(-0.457)
-0.0027
(-0.347)
0.0032
(0.872)
-0.0053
(-1.501)
0.0029
(0.437)
-0.0002
(-0.344)
0.0412***
(3.397)
0.0214
(0.512)
Sweden
-0.0030**
(-2.560)
0.0013
(1.062)
-0.0079
(-1.496)
-0.0088***
(-3.247)
-0.0057***
(-2.671)
-0.0060***
(-2.717)
-0.0039
(-1.317)
-0.0027
(-1.294)
-0.0028
(-1.313)
0.0045***
(3.805)
0.0506
(0.989)
-0.0013***
(-5.736)
-0.0115***
(-4.638)
0.0002
(0.614)
-0.0007
(-0.625)
0.0004
(0.393)
-0.0026
(-1.564)
-0.0003**
(-2.312)
0.0056***
(3.171)
0.0322***
(6.506)
U.K.
0.0038
(1.390)
-0.0011
(-0.631)
-0.0042
(-0.876)
-0.0109**
(-2.282)
-0.0076*
(-1.834)
-0.0154***
(-3.887)
-0.0101**
(-2.386)
-0.0135***
(-3.482)
-0.0036
(-0.815)
0.0114***
(5.709)
3.3483***
(4.624)
-0.0070***
(-12.588)
-0.0239***
(-5.674)
0.0013
(1.412)
-0.0011
(-0.595)
0.0014
(0.706)
-0.0076
(-1.567)
-0.0007**
(-2.045)
Observations
Adjusted R2
2638
0.021
5191
0.030
580
0.009
7182
0.023
8870
0.102
Insider class B
Insider class C
Energy
Materials
Industrials
Consumer Dis.
Austria
-0.0031
(-0.546)
0.0088
(1.282)
-0.0036
(-0.242)
-0.0127
(-0.991)
-0.0132
(-1.188)
-0.0128
(-0.930)
Consumer Sta.
Financials
712
-0.006
337
0.308
38
5367
0.008
0.1604***
(12.028)
Table VII - Continued
Insider class B
Insider class C
Energy
Materials
Industrials
Consumer Dis.
0.0771**
(2.140)
-0.0099
(-0.361)
-0.0144
(-1.150)
-0.0658
(-0.249)
-0.0213
(-1.598)
-0.0873*
(-1.771)
0.0188
(1.154)
-0.0103
(-0.864)
0.0060
(0.308)
0.0084
(0.695)
-0.0033**
(-2.372)
0.0034
(0.277)
0.4385*
(1.653)
France
0.0006
(0.422)
-0.0004
(-0.255)
-0.0058
(-1.544)
-0.0075*
(-1.789)
-0.0038
(-1.314)
-0.0057*
(-1.841)
-0.0043
(-1.270)
-0.0018
(-0.441)
-0.0058*
(-1.919)
-0.0013
(-0.847)
0.0020
(0.095)
-0.0002
(-0.349)
-0.0147***
(-3.180)
0.0014
(0.752)
-0.0003
(-0.192)
-0.0037
(-1.274)
-0.0016
(-1.212)
-0.0004**
(-2.254)
-0.0091***
(-2.583)
0.0127
(1.183)
Panel B: All Sales
Germany Ireland
0.0026
-0.0036
(1.119)
(-0.249)
0.0050** 0.0189
(2.224)
(1.039)
0.0060
-0.0274
(1.074)
(-1.591)
0.0011
-0.0295
(0.308)
(-0.966)
0.0014
-0.0258
(0.382)
(-1.067)
0.0041
-0.0282
(1.271)
(-1.282)
-0.0014
-0.0084
(-0.390)
(-0.312)
0.0029
-0.0252
(0.914)
(-1.080)
0.0035
(1.043)
0.0011
0.0247*
(0.378)
(1.710)
0.0455
0.1148
(1.032)
(0.213)
0.0011** 0.0048
(2.289)
(0.696)
-0.0037
-0.0370
(-0.655)
(-1.026)
-0.0006
-0.0029
(-0.287)
(-0.167)
0.0013
0.0064
(0.694)
(0.539)
0.0033
0.0276
(0.654)
(0.789)
-0.0043** 0.0031
(-2.212)
(0.320)
-0.0005** -0.0011
(-2.268)
(-0.458)
-0.0012
(-0.258)
-0.0179*
-0.1252
(-1.649)
(-0.877)
Italy
-0.0004
(-0.223)
0.0024
(0.869)
-0.0000
(-0.001)
0.0009
(0.193)
0.0002
(0.070)
-0.0042
(-1.007)
0.0027
(0.561)
-0.0012
(-0.376)
-0.0021
(-0.554)
0.0021
(1.177)
-0.0072
(-0.332)
-0.0008
(-1.207)
-0.0188**
(-2.520)
0.0026
(1.409)
0.0047**
(2.406)
0.0010
(0.303)
-0.0035
(-1.374)
0.0005*
(1.854)
0.0004
(0.057)
0.0130
(0.867)
Netherl.
0.0029
(0.939)
0.0022
(0.590)
0.0049
(0.499)
-0.0064
(-0.604)
-0.0034
(-0.402)
-0.0032
(-0.386)
-0.0058
(-0.734)
-0.0037
(-0.422)
-0.0007
(-0.082)
0.0019
(0.586)
-0.0094
(-0.084)
0.0020**
(1.992)
-0.0101
(-0.855)
0.0001
(0.020)
-0.0091**
(-2.278)
-0.0001
(-0.012)
-0.0019
(-0.537)
0.0003
(0.540)
-0.0061
(-1.020)
-0.0366
(-1.453)
Sweden
0.0020
(0.980)
0.0018
(0.822)
0.0049
(0.871)
-0.0015
(-0.273)
-0.0030
(-1.227)
-0.0034
(-1.232)
0.0075*
(1.679)
-0.0013
(-0.530)
-0.0034
(-1.297)
-0.0006
(-0.442)
0.0551
(1.371)
0.0003
(0.856)
-0.0095**
(-2.241)
-0.0002
(-0.343)
0.0025
(1.604)
0.0003
(0.149)
-0.0008
(-0.555)
0.0000
(0.057)
0.0032
(1.335)
-0.0114
(-1.317)
U.K.
0.0014
(0.998)
-0.0009
(-0.531)
-0.0103***
(-2.905)
-0.0134***
(-3.041)
-0.0130***
(-4.167)
-0.0107***
(-3.280)
-0.0076**
(-2.180)
-0.0128***
(-4.073)
-0.0126***
(-3.886)
-0.0021
(-1.240)
0.0496
(0.664)
-0.0000
(-0.003)
-0.0168***
(-3.928)
0.0014
(0.924)
0.0014
(0.951)
0.0023
(0.942)
0.0001
(0.094)
-0.0004
(-1.458)
238
2253
2691
69
2101
571
3605
2498
0.108
0.016
0.010
-0.096
0.017
0.024
0.011
0.024
Austria
-0.0176*
(-1.933)
-0.0131
(-1.084)
0.0853*
(1.706)
0.0460
(1.593)
0.0489**
(1.986)
0.0211
(1.128)
Consumer Sta.
Financials
IT
Multiple trade
Transaction size
Firm size
Momentum
Book to market
Frequent trading
Previous buy
Previous sell
Day gap
Legal change
Constant
Observations
Adjusted R
2
39
0.0112
(1.288)
Table VIII
Cumulative Abnormal Returns for European Insider Trades by Industry Sectors
This table reports the CAARs for directors’ trades between 01/2003 and 12/2009 for eight European countries. Sector
categorization is provided by COMPUSTAT. t-statistic is the lowest absolute value of all four test statistics applied for each
CAAR and Observation (tCAAR, trank, J1, J2). All CAARs have been computed in an event-study framework as proposed by
MacKinlay (1997). An estimation window of 180 trading days and an observation window of 41 days centered on the
announcement day have been used. The market return is approximated by the corresponding (Gross) MSCI Barra
Performance Share Index for each single country.
All Transactions
Sector
N
Energy
Materials
Industrials
Consumer
Discretionary
Consumer
Staples
Health
Care
Financials
IT
Purchases
CAAR
t-statistic
Sales
CAAR
t-statistic
Purchases
CAAR
t-statistic
Sales
CAAR
t-statistic
Purchases
CAAR
t-statistic
Sales
CAAR
t-statistic
Purchases
CAAR
t-statistic
Sales
CAAR
t-statistic
Purchases
CAAR
t-statistic
Sales
CAAR
t-statistic
Purchases
CAAR
t-statistic
Sales
CAAR
t-statistic
Purchases
CAAR
t-statistic
Sales
CAAR
t-statistic
Purchases
CAAR
t-statistic
Sales
CAAR
t-statistic
CAAR
(0;1)
CAAR
(0;4)
CAAR
(-20;-1)
CAAR
(0;20)
1.11%
4.07
1.56%
3.17
-2.67%
-4.03
3.92%
4.80
-0.24%
-1.83
-0.47%
-1.01
1.33%
2.51
-1.23%
-0.30
0.44%
1.98
0.84%
2.83
-3.45%
-6.28
1.03%
2.13
-0.38%
-1.83
-0.50%
-1.01
1.64%
2.51
-0.60%
-0.30
0.76%
4.30
1.30%
5.24
-3.40%
-7.35
1.98%
4.59
-0.37%
-3.63
-0.64%
-3.27
1.77%
7.02
-2.13%
-4.58
0.60%
5.53
0.92%
5.94
-2.99%
-7.19
1.57%
4.67
-0.39%
-2.72
-0.63%
-3.30
2.58%
7.62
-2.26%
-5.59
0.57%
3.50
0.71%
2.95
-2.78%
-2.79
1.54%
2.89
-0.10%
-0.87
-0.40%
-1.44
1.05%
2.29
-1.51%
-0.99
1.86%
6.12
2.56%
6.38
-2.14%
-2.18
4.03%
6.69
-0.19%
-1.30
-0.50%
-1.26
3.20%
5.29
-1.49%
-0.91
0.51%
4.86
0.81%
4.98
-2.68%
-7.70
1.61%
4.02
-0.25%
-2.56
-0.48%
-3.11
1.35%
5.62
-2.25%
-4.43
1.10%
6.54
1.60%
6.11
-2.83%
-5.03
3.14%
6.90
-0.45%
-3.31
-1.12%
-4.11
1.67%
5.72
-3.41%
-5.65
927
464
1851
596
7146
3106
5706
2419
1214
608
1607
950
7118
2803
4900
3034
40
Table IX
Market Reaction to European Insider Trades
This table shows multivariate OLS regressions with CAAR(0;1) as the dependent variable. Insiders are categorized in three
groups (for detailed categorization see Table V): Insider class A (top-level executives), Insider class B (mid-level
executives), and Insider class C (low-level and non-executives). Insider class A is the base category. Sector dummy variables
are categorized as follows: Healthcare, Energy, Industrials, Consumer Discretionary, Consumer Staples, Financials, IT.
Healthcare is the base category. Multiple trade is set to one if more than one insider of a company trades on the same day.
Transaction size is the relative size of a transaction based on the shares outstanding on the trading day. Firm size is calculated
as the natural logarithm of the shares outstanding multiplied by the closing price of the underlying share on the trading day.
Momentum measures the performance of shares 100 trading days prior to the transaction day. Book to market is the book to
market value at the beginning of the year when the transaction took place. Frequent trading is set to one if the average trade
frequency in the respective firm is higher than the average trade frequency of all firms in the respective country. Previous buy
(Previous sell) is set to one if there has been at least one purchase (sale) announcement 20 days before the respective
announcement, and zero otherwise. Day gap is the difference (in business days) between trade and announcement day. Legal
change, is set to one if the transaction has been performed after the implementation of the Market Abuse Directive
2003/6/EC, and zero otherwise. All models include country (which are all significant at the 1% level except for Ireland) and
year dummies. Standard errors are adjusted for heteroscedasticity and t-statistics are reported in parentheses. *,**,***
indicate significance at the 10, 5, and 1% level, respectively
Insider class B
Insider class C
Energy
Materials
Industrials
Consumer Dis.
Consumer Sta.
Financials
IT
Multiple trade
Transaction size
Firm size
Momentum
Book to market
Frequent trading
Previous buy
Previous sell
Day gap
Legal Change
Constant
Observations
Adjusted R
2
All Purchases
-0.000792
(-0.900)
-0.000421
(-0.542)
-1.54e-05
(-0.00645)
-0.00621***
(-3.065)
-0.00549***
(-3.175)
-0.00780***
(-4.601)
-0.00830***
(-4.249)
-0.00493***
(-2.952)
-0.00410**
(-2.294)
0.00712***
(7.878)
0.228***
(3.630)
-0.00322***
(-15.77)
-0.0187***
(-8.274)
0.00151**
(2.354)
-0.00196***
(-2.585)
0.00119
(1.579)
-0.00240*
(-1.746)
-0.000190**
(-2.227)
0.00292**
(2.207)
0.0799***
(14.51)
All Sales
0.000439
(0.503)
0.000673
(0.734)
-0.00171
(-0.988)
-0.00259
(-1.210)
-0.00267**
(-2.010)
-0.00276*
(-1.926)
-4.66e-05
(-0.0297)
-0.00176
(-1.239)
-0.00283**
(-2.030)
-0.000144
(-0.167)
0.0349
(1.399)
0.000167
(0.728)
-0.0110***
(-4.160)
-8.31e-05
(-0.136)
0.00170**
(2.270)
0.00111
(0.843)
-0.00166**
(-2.070)
-0.000272**
(-2.562)
-2.66e-05
(-0.0195)
0.00198
(0.356)
30878
14029
0.053
0.009
41