Estimating the returns of insider trading by a method of performance evaluation

Abstract

Insider trading is understood as a negative motivator for regular investors. This is because they gain abnormal returns that effect the sentiments of the investors. To measure the abnormal returns earned by the insiders, I used a method of performance evaluation. The results prove that they earn abnormal returns of an average of 5.5% per year. This study provides evidence of higher returns when traded closer to the day of announcement of insider information to the public. The study also shows considerable impact on the returns due to the attributes of the firms such as the firm size, book to market ratio of the firm, insiders’ position with the firm and the ownership of the shares. This study did not find evidence of abnormal returns earned by insider sale transactions. Hence, as we find profits exceeds normal returns for insiders, there is evidence against strong form of market efficiency.