The daily and intradaily effects of UK director dealings on stock trade price and non-price characteristics

Abstract

This thesis proposes a new classification of insider dealings based on their qualitative characteristics and their execution strategy. First, this thesis finds that the ‘stated purpose’ characteristic reported in the announcements of insider dealings at the London Stock Exchange helps distinguishing between discretionary and non-discretionary dealings, and that the former, especially discretionary sales, are associated with higher abnormal returns. Second, this thesis introduces a new algorithm for matching insider dealing announcements to actual executed trades with a much higher detection rate compared to past papers. The first analysis uses the detected trades to identify intraday stealth trading and investigates how this affects subsequent pricing. The results indicate that stealth-trading practices are associated with weaker and longer-lived information signals. When directors face shorter-lived negative information, they opt not to trade stealthily and execute their intended sale in one large order. In addition, their holding status helps to explain why they are rushing to sell shares when they are in the possession of negative information. Nowadays, UK directors tend to have large shareholding percentages, as well as high potential ownership from future stock rewards. They, therefore, rush to sell shares but not rush to buy shares. The second analysis uses standard measures of adverse selection costs to investigate the level of information asymmetry on the days of director trades. These adverse selection measures show that there are higher levels of information asymmetry and adverse selection costs on days with director upstairs informed trades. Some upstairs trades are subject to a pre-trade transparency requirement while others are not. The third analysis investigates the price and non-price impacts around director trades with a focus on how pre-trade transparency of director trades affects the market ability in uncovering the implied private information. The analysis shows evidence that the pre-trade transparency requirement helps the market uncover different levels of implied information by UK director trades. The lack of pretrade transparency reduces the ability of the market to incorporate the implied private information. This stresses out the importance of transparency regulatory requirements.