Decoding insider trades : an empirical analysis of how the Swedish stock market reacts to insider trading activity

Abstract

In our study we explore and analyze 6 627 insider trades made on the NASDAQ OMX Stockholm between 2010 and 2014. We ask if publicly available information on insider trading can give insight into where stock prices will head in the future and if outside investors can earn abnormal returns by creating portfolios based on such information. We conduct our research using the event-study methodology as described by MacKinlay (1997) and show that insiders are better informed about the overall future performance of their company, indicating a violation of the semi-strong form market efficiency hypothesis. We show that different firm characteristics such as market capitalization, financial leverage and industry, together with individual characteristics such as insider type and traded volume, can emphasize differences in abnormal returns following insider trades. Based on our findings we create three rule-based insider portfolios. We show that we are able to gain risk-adjusted returns above the market, but when controlling for transaction costs the risk-adjusted return vanish. Our study has implications for market efficiency and offers important insights for those who seek to earn higher returns by following strategies based on the publication of insider trades.