New York – A recently released study suggests that trading by corporate insiders is a meaningful source of investment returns. The study, conducted by professors at the European Business School, finds that the information yields ‘abnormal returns’ in many but not all European markets. The effect is weakest in the French law countries studied (France, Italy, and the Netherlands). The study validates work we have done for a variety of our clients sourcing this data for Europe and other domiciles.
Released at the end of August, “Are Directors’ Dealings Informative? Evidence from European Stock Markets” by Andre Güttler and Kaspar Dardas of the European Business School analyzes short-term announcement effects of insider transaction data for eight European countries, namely Austria, France, Germany, Ireland, Italy, the Netherlands, Sweden, and the U.K, between 01/2003 and 12/2009.
There is a strong body of academic literature supporting the value of insider transaction data to outside investors, most of it focused on U.S. markets. For example, a 1997 study by Bettis, Vickery, and Vickery, who are now principals at the independent forensic research firm Gradient Analytics, showed that outsiders are able to make significant profits from insider transaction data. Specifically, they reported an abnormal return of 6% for a holding period of 26 weeks.
In the U.S., insider transaction reporting has been in place since 1934. The U.K. implemented insider trading laws in 1979, updated in the 1985 Companies Act. Most other European countries did not implement directors’ dealings regulations before the 1990’s. Council Directive 89/592/EEC in 1992 sought to control for insider trading across all European capital markets. This was superseded in 2004 by the Market Abuse Directive 2003/6/EC (2004/72/EC) which requires that directors’ dealings reports are released within five business days and contain information such as size, price, and the characteristic of the transaction. Because European reporting requirements are more recent, and – despite EC regulations – still vary by domicile, the study examines the value of the data for eight European markets.
The results show significant results for four markets, Germany, Ireland, Sweden, and the U.K. Ireland and the U.K. had the highest one-day returns on the day of the announcement, 5.03% and 6.12% respectively. English law countries (U.K. and Ireland) showed the strongest market reactions. On the other hand, French law countries (France, Italy, and the Netherlands) collectively show the smallest reactions to insider trades. The authors suggested two reasons for this effect. First, English law countries have stronger traditions of corporate governance, which yields stronger market reactions to insider purchases. Second, the French law domiciles have been more lax in their implementation of EC insider transaction reporting requirements.
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 or adhoc newsportals in Germany such as the DGAP internet page. 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.
The study also found that the larger the insider transactions, the more market impact they have. Generally, net purchases and sales that represent at least 0.1% of a firm’s market capitalization are viewed as meaningful. Insider purchases have more impact than insider sales. 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. The study also examined to see if transactions by more senior executives made a larger market impact, but found no significant differences between C-level transactions and those of other employees.
The full report can be found at http://ssrn.com/abstract=1615607.