7/27/2019 Benefits of Insider Trading to Financial Markets

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Benefits Of insider Trading To FinancialMarkets

In Jaikishins NUS honors year thesis, he examined 653 insidertransactions between January 1989 and December 1990. Hefound that insiders outperformed the market and enjoyed a post-trading abnormal return from day 0 to day 250 after theirtransactions.

Most of the abnormal returns wasgain from sell trades(a returnof 116.87 per cent); that is the share price declined substantiallyafter they sold their shares. On average, however, they lost moneywhen they bought their shares. They chalked up losses of 44.04per cent. Outsiders who followed suit after the trades werereported also made similar gains or losses. His study, however, didnot take into consideration trading costs.

Jaikishin found that transactions of small company insiders did notcontain more information than those of bigger firms. Theexplanation given for the loss-making buy trades of insiders wasthat insiders tend to conceal information-laden buy trades throughthe use of family members or friends while using their own namesonly for trades without information.

Many a time, insiders also go into the market to buy their own

shares in order to support the share price. Or, some of the trades

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7/27/2019 Benefits of Insider Trading to Financial Markets

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were carried out to confuse the market or mask their real intents.

I randomly selected 17 trades by insiders in the last one year. The

companies involved were Cerebos, Lum Chang, Ho Bee,Beyonics, Multi-Chem, Eastern Publishing, Pan United Corp, DelMonte, SingTel, DBS, Frontline Technologies and Datacraft. Out ofthat, 13 were 'buy trades and four seIl trades. Assuming you hadfollowed the insiders, your average abnormal return after one weekwould have been -2 per cent after taking into account two-waytransaction costs of 2 per cent. I calculated abnormal return as theexcess return over the Straits Times Index return. No riskadjustment was made.

The two-week average abnormal return was -1 per cent, and theaverage abnormal return for one month and three monthssubsequent to the trades were 4 per cent and 5 per centrespectively. Particularly, you could have reaped huge profits if youhad followed Datacrafts chief operating officer Koh See Heongwhen he cut his personal interest to 10,868 shares after he sold220,000 shares at US$3.35 each on Oct 4, 2001.

In the following one month, Datacrafts share price fell to US$1.79.Excluding Datacraft, the average abnormal returns for the 1-week,2-week, 1-month and 3-month periods were -1 per cent, 0 per centand 1 per cent and 3 per cent respectively.

Based on the limited sample size, the observations which can bemade are: Sell trades appear to contain more information. But this

could be due to the overwhelming effect of Datacraft. Trades byinsiders appear tobear substantial fruitonly some three monthsdown the road.

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