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Three Essays on Insider Trading Open Access


Other title
stock price informativeness
insider trading
firm value
Type of item
Degree grantor
University of Alberta
Author or creator
Tang, Zhenyang
Supervisor and department
Morck, Randall (Faculty of Business)
Examining committee member and department
Dunbar, Craig (Ivey Business School)
McLean, David (Faculty of Business)
Watanabe, Masahiro (Faculty of Business)
Wier, Heather (Faculty of Business)
Yahya, Moin (Faculty of Law)
Faculty of Business
Date accepted
Graduation date
Doctor of Philosophy
Degree level
The first essay of the thesis examines the effect of legal insider trading intensity on stock price informativeness. Open market transactions by corporate insiders are considered informative because they predict future stock returns and future firm-specific cash flows. As a result, it may seem natural to assume a positive association between the intensity of reported insider trading and stock price informativeness. However, it is also possible that insider trading discourages outsiders from information collection, and the overall informational efficiency may be lowered if outsider information collection is crowded out. I find that firms with higher insider trading intensity tend to have higher firm-specific return variation. Stocks of firms with higher insider trading intensity experience less negative abnormal returns around SEO announcements, and are less affected by long-term return reversal. The findings support the view that legal insider trading makes stock prices more informative. The second essay investigates whether insider trading affects firm value. If insider trading intensity promotes informational efficiency, it may enhance firm value by lowering cost of capital. I find that firms with larger and more frequent insider trading have higher values of Tobin’s q, after accounting for other determinants of firm value. The positive associations are robust if only insider purchases or sales are analyzed, and are stronger for firms with higher information asymmetry. The incidence of firm-level insider trading restrictions is negatively associated with Tobin’s q. Consistent with the view that the intensity of legal insider trading affects firm value by lowering cost of capital, I find a negative association between insider trading intensity and implied cost of capital. The third essay investigates how insider trading affects price formation prior to mergers and acquisitions. I find that about one third of the total price run-up in M&As occurs before announcements, and the pre-announcement price run-up does not seem to be caused by market anticipation or trading reported by corporate insiders. Instead, the pre-announcement price run-up is significantly larger when media attention on insider trading is lower, when institutional ownership is lower, and when probability of informed trading is higher. The findings are consistent with the view that the target stock price run-up prior to M&A announcements is caused by unreported illegal insider trading.
Permission is hereby granted to the University of Alberta Libraries to reproduce single copies of this thesis and to lend or sell such copies for private, scholarly or scientific research purposes only. Where the thesis is converted to, or otherwise made available in digital form, the University of Alberta will advise potential users of the thesis of these terms. The author reserves all other publication and other rights in association with the copyright in the thesis and, except as herein before provided, neither the thesis nor any substantial portion thereof may be printed or otherwise reproduced in any material form whatsoever without the author's prior written permission.
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