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Does Cross-Listing Mitigate Insider Trading?

Does Cross-Listing Mitigate Insider Trading?. Adriana Korczak and Meziane Lasfer Cass Business School, London. Introduction. Evidence that insiders trade profitably around major corporate events using private information Bankruptcy protection: Seyhun & Bradley (1997)

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Does Cross-Listing Mitigate Insider Trading?

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  1. Does Cross-Listing Mitigate Insider Trading? Adriana Korczak and Meziane Lasfer Cass Business School, London

  2. Introduction • Evidence that insiders trade profitably around major corporate events using private information • Bankruptcy protection: Seyhun & Bradley (1997) • New issues: Karpoff and Lee (1991) • Buybacks: Lee, Mikkelson & Partch (1992) • Earnings forecasts: Penman (1982) • Takeovers: Seyhun (1990), Bris (2005) • Dividend announcements: John and Lang (1991) • Exchange listings/de-listings: Lamba and Khan (1999) • Evidence that insiders earn significant exceptional returns • US: Jaffe (1974), Finnerty (1976), Seyhun (1986), Lakonishok and Lee (2001) • U.K: Pope et al (1990), Gregory et al (1994) & in other countries… • But is Insider Trading profitable after transaction costs?

  3. Issues: Should insider trading be regulated? • What and How to regulate – Controversies: • What is insider trading and who is the insider • How to treat non-information trading (e.g., portfolio changes, liquidity) and trading on miss-valuation • Insider trading should not be regulated because: • It increases market efficiency, thus, • Prices will reflect all information – Closer to strong form EMH • Signalling Buy (sell) trades to signal under- (over-) valuation • Insider trading should be regulated because: • Trading on private information implies transfer of wealth • Decrease market efficiency through • Reduction in liquidity • Informed investors set up strategies to mimic insider trades

  4. Objective of the paper • Test whether cross-listing mitigates the trading on insider information • The legal and reputational bonding hypotheses • UK and US roughly same governance, thus not testing the bonding hypothesis as defined by (Cofee 1999, 2002; Stulz, 1999) • Cross-listed companies are subject to both domestic and foreign Legislation • US and UK are relatively complementary – Table 1 • Increased disclosure requirements • Less information asymmetries because more thorough investor monitoring • Stronger bad image effects…

  5. Cross-listing • Parallel listing on domestic and foreign stock exchanges • Particularly popular and widely investigated over the last 15-20 years

  6. Data • Source • Insider trading - Director Deals Ltd. • Cross-listing - BoNY, NASDAQ/NYSE/AMEX • Stock prices, accounting data and news - Perfect Analysis • Sample • 1999-2003 • 928 UK companies (CL = 115, 12%) • Total number of observations - NALL=13,529 (CL = 18%, BuyALL = 78% (CL = DL))

  7. Description of the data (1) Table 2 Mean Median Mean Median

  8. Description of the data (2) Table 2 CL DL Mean Median Mean Median t MW

  9. Methodology • Event study methodology • Event day [day 0] • Insider trading announcement date • Insider trading date • Event window [-100; +100] • Estimation window [-360; -101] • News announcements • Regressions – • OLS • To account for fundamental characteristics of cross-listed firms (Reese and Weisbach, 2002; Doidge et al., 2004): Larger, higher growth and profitability • 2SLS and 2-stage Heckman estimation (Heckman, 1978)

  10. Summary of the results Sell Trades CL DL DL CL Buy Trades

  11. Empirical Results

  12. OLS Regressions

  13. Regressions – Selectivity Bias

  14. Robustness checks • Confounding events [-5, +5] • Same results • Announcement day vs. Trading day • Similar results • Announcement dates provide more information than trading dates • Bull vs. bear markets • Cross-listed companies: More information in bear period • More differences in domestically-listed firms • Alternative event study methodologies • Same results using market adjusted model, mean adjusted model… • Control sample – Size effect, similar results

  15. Impact of News AnnouncementsPre-event – Buy trades

  16. Impact of news announcementsPost-event – Buy trades

  17. Impact of news: Pre-Sell trades

  18. Impact of news: Post-Sell Trades

  19. Conclusions • Insiders are informed investors because • They are contrarians: Negative (Positive) CARs before buy (sell) trades • Positive (negative) CARs after buy (sell) trades • Significant differences between cross-listed and domestically-listed companies • Abnormal returns and • news impacts • are significantly smaller for cross-listed firms • Implication: • bonding contract limits the propensity of insiders to trade on insider information • Coffee (1999), Reese and Weisbach (2002), Doidge (2004) and Doidge, Karolyi and Stulz (2004)

  20. Questions • Why do managers still trade before news is announced, despite the legal constraints? • Is the bonding contract not binding? • King and Segal (2004), Segal (2005) and Licht (2003) • Use other markets • US domestic vs. UK cross-listed companies • Other cross-listed companies in US • Use other news, especially financial analysts forecasts • Market micros-structure effect • Bid-ask spread – adverse selection problem

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