Does cross listing mitigate insider trading
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Does Cross-Listing Mitigate Insider Trading?. Adriana Korczak and Meziane Lasfer Cass Business School, London. Introduction. Evidence that insiders trade profitably around major corporate events using private information Bankruptcy protection: Seyhun & Bradley (1997)

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Does Cross-Listing Mitigate Insider Trading?

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Does cross listing mitigate insider trading

Does Cross-Listing Mitigate Insider Trading?

Adriana Korczak and Meziane Lasfer

Cass Business School, London


Introduction

Introduction

  • Evidence that insiders trade profitably around major corporate events using private information

    • Bankruptcy protection: Seyhun & Bradley (1997)

    • New issues: Karpoff and Lee (1991)

    • Buybacks: Lee, Mikkelson & Partch (1992)

    • Earnings forecasts: Penman (1982)

    • Takeovers: Seyhun (1990), Bris (2005)

    • Dividend announcements: John and Lang (1991)

    • Exchange listings/de-listings: Lamba and Khan (1999)

  • Evidence that insiders earn significant exceptional returns

    • US: Jaffe (1974), Finnerty (1976), Seyhun (1986), Lakonishok and Lee (2001)

    • U.K: Pope et al (1990), Gregory et al (1994) & in other countries…

  • But is Insider Trading profitable after transaction costs?


Issues should insider trading be regulated

Issues: Should insider trading be regulated?

  • What and How to regulate – Controversies:

    • What is insider trading and who is the insider

    • How to treat non-information trading (e.g., portfolio changes, liquidity) and trading on miss-valuation

  • Insider trading should not be regulated because:

    • It increases market efficiency, thus,

      • Prices will reflect all information – Closer to strong form EMH

      • Signalling Buy (sell) trades to signal under- (over-) valuation

  • Insider trading should be regulated because:

    • Trading on private information implies transfer of wealth

    • Decrease market efficiency through

      • Reduction in liquidity

      • Informed investors set up strategies to mimic insider trades


Objective of the paper

Objective of the paper

  • Test whether cross-listing mitigates the trading on insider information

  • The legal and reputational bonding hypotheses

    • UK and US roughly same governance, thus not testing the bonding hypothesis as defined by (Cofee 1999, 2002; Stulz, 1999)

    • Cross-listed companies are subject to both domestic and foreign Legislation

      • US and UK are relatively complementary – Table 1

    • Increased disclosure requirements

    • Less information asymmetries because more thorough investor monitoring

    • Stronger bad image effects…


Cross listing

Cross-listing

  • Parallel listing on domestic and foreign stock exchanges

  • Particularly popular and widely investigated over the last 15-20 years


Does cross listing mitigate insider trading

Data

  • Source

    • Insider trading - Director Deals Ltd.

    • Cross-listing - BoNY, NASDAQ/NYSE/AMEX

    • Stock prices, accounting data and news - Perfect Analysis

  • Sample

    • 1999-2003

    • 928 UK companies (CL = 115, 12%)

    • Total number of observations - NALL=13,529 (CL = 18%, BuyALL = 78% (CL = DL))


Description of the data 1 table 2

Description of the data (1) Table 2

Mean Median Mean Median


Description of the data 2 table 2

Description of the data (2) Table 2

CL DL

Mean Median Mean Median t MW


Methodology

Methodology

  • Event study methodology

    • Event day [day 0]

      • Insider trading announcement date

      • Insider trading date

    • Event window [-100; +100]

  • Estimation window [-360; -101]

  • News announcements

  • Regressions –

    • OLS

    • To account for fundamental characteristics of cross-listed firms (Reese and Weisbach, 2002; Doidge et al., 2004): Larger, higher growth and profitability

      • 2SLS and 2-stage Heckman estimation (Heckman, 1978)


Summary of the results

Summary of the results

Sell Trades

CL

DL

DL

CL

Buy Trades


Empirical results

Empirical Results


Ols regressions

OLS Regressions


Regressions selectivity bias

Regressions – Selectivity Bias


Robustness checks

Robustness checks

  • Confounding events [-5, +5]

    • Same results

  • Announcement day vs. Trading day

    • Similar results

    • Announcement dates provide more information than trading dates

  • Bull vs. bear markets

    • Cross-listed companies: More information in bear period

    • More differences in domestically-listed firms

  • Alternative event study methodologies

    • Same results using market adjusted model, mean adjusted model…

  • Control sample – Size effect, similar results


Impact of news announcements pre event buy trades

Impact of News AnnouncementsPre-event – Buy trades


Impact of news announcements post event buy trades

Impact of news announcementsPost-event – Buy trades


Impact of news pre sell trades

Impact of news: Pre-Sell trades


Impact of news post sell trades

Impact of news: Post-Sell Trades


Conclusions

Conclusions

  • Insiders are informed investors because

    • They are contrarians: Negative (Positive) CARs before buy (sell) trades

    • Positive (negative) CARs after buy (sell) trades

  • Significant differences between cross-listed and domestically-listed companies

    • Abnormal returns and

    • news impacts

      • are significantly smaller for cross-listed firms

  • Implication:

    • bonding contract limits the propensity of insiders to trade on insider information

      • Coffee (1999), Reese and Weisbach (2002), Doidge (2004) and Doidge, Karolyi and Stulz (2004)


Questions

Questions

  • Why do managers still trade before news is announced, despite the legal constraints?

    • Is the bonding contract not binding?

      • King and Segal (2004), Segal (2005) and Licht (2003)

    • Use other markets

      • US domestic vs. UK cross-listed companies

      • Other cross-listed companies in US

    • Use other news, especially financial analysts forecasts

  • Market micros-structure effect

    • Bid-ask spread – adverse selection problem


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