Legal insider trading and stock market liquidity

Hans Degryse, Frank de Jong, J.J.G. Lefebvre

Research output: Contribution to journalArticleScientificpeer-review

Abstract

This paper assesses the impact of legal trades by corporate insiders on the liquidity of the firm’s stock. For this purpose, we analyze two liquidity measures and one information asymmetry measure. The analysis allows us to study as well the effect of a change in insider trading regulation, namely the implementation of the Market Abuse Directive (European Union Directive 2003/6/EC) on the Dutch stock market. The first set of results shows that, in accordance with theories of asymmetric information, the intensity of legal insider trading in a given company is positively related to the bid-ask spread and to the information asymmetry measure. We also find that the Market Abuse Directive did not reduce significantly this effect. Secondly, analyzing liquidity and information asymmetry around the days of legal insider trading, we find that small and large capitalization stocks see their bid-ask spread and the permanent price impact increase when insiders trade. For mid-cap stocks, only the permanent price impact increases. Finally, we could not detect a significant improvement of these results following the change in regulation.
LanguageEnglish
Pages83-104
JournalDe Economist
Volume164
Issue number1
DOIs
StatePublished - Mar 2016

Fingerprint

Information asymmetry
Stock market liquidity
Liquidity
Insider trading
Price impact
Insider
Market abuse
Bid/ask spread
Capitalization
Asymmetric information
European Union
Stock market

Keywords

  • Insider trading
  • Financial markets regulation
  • Stock market liquidity
  • Information asymmetry

Cite this

Degryse, H., de Jong, F., & Lefebvre, J. J. G. (2016). Legal insider trading and stock market liquidity. De Economist, 164(1), 83-104. DOI: 10.1007/s10645-015-9261-0
Degryse, Hans ; de Jong, Frank ; Lefebvre, J.J.G./ Legal insider trading and stock market liquidity. In: De Economist. 2016 ; Vol. 164, No. 1. pp. 83-104
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Degryse, H, de Jong, F & Lefebvre, JJG 2016, 'Legal insider trading and stock market liquidity' De Economist, vol. 164, no. 1, pp. 83-104. DOI: 10.1007/s10645-015-9261-0

Legal insider trading and stock market liquidity. / Degryse, Hans; de Jong, Frank; Lefebvre, J.J.G.

In: De Economist, Vol. 164, No. 1, 03.2016, p. 83-104.

Research output: Contribution to journalArticleScientificpeer-review

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Degryse H, de Jong F, Lefebvre JJG. Legal insider trading and stock market liquidity. De Economist. 2016 Mar;164(1):83-104. Available from, DOI: 10.1007/s10645-015-9261-0