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Insider Trading and Market Efficiency

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Insider Trading and Market Efficiency
Journal of Finance and Accountancy

Insider t nsider trading and market efficiency: Do insiders buy low and sell h high?
Stephanie Roddenberry Longwood University Dr. Frank Bacon Longwood University ABSTRACT The purpose of this study was to test the semi-strong form efficient market hypothesis strong using insider sale and purchase announcements and their effect on the risk adjusted rate of return of the firms’ stock price. Past studies using varying methodologies, including the risk adjusted model for event study methodology as used in this study, have found conflicting results have regarding the form of market efficiency upheld in the United States. By definition, a semisemi strong form efficient market would not allow any investor to earn an above normal risk adjusted return or to consistently outperform the market on the basis of publicly available information, such as an insider trade announcement. This study tests the speed of the market’s reaction to an insider trade announcement to determine if the reaction occurs either on or before the event, thus upholding the semi-strong form efficient market hypothesis. The analysis of two sample groups, strong sale and purchase insider trade announcements, was used to determine if and when the risk adjusted return of the stock price is significantly affected both on the announcement date and the during the defined event period. Results for insider sales support the semi-strong form efficient strong market hypothesis while the insider purchases analysis findings are mixed. The evidence is at . odds with the literature as insiders sales/purchases announcements delivered negative/positive insiders’ signals, respectively. Evidence of pre pre-announcement trading and an over-reaction effect were reaction also observed. For insider purchases and sales, the insiders follow a pattern of “buying low and selling high”. Keywords: insider trade, sale announcements, purchase announcements, semi strong efficient semi-strong
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