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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

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


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





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




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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