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Insider trading restrictions and the stock market

Author: Vermaelen, Theo ; Kabir, RezaulINSEAD Area: Finance Series: Working Paper ; 91/31/FIN Publisher: Fontainebleau : INSEAD, 1991.Language: EnglishDescription: 25 p.Type of document: INSEAD Working Paper Online Access: Click here Abstract: This paper examines the effect of the introduction of insider trading restrictions on the behaviour of the Amsterdam Stock Exchange. From 1987 on, insiders were no longer allowed to trade two months before an annual earnings announcement and three weeks before a semi-annual earnings announcement. The results indicate that stocks became less liquid when insiders were not allowed to trade. Although the law may have increased the willingness of outsiders to trade before earnings announcements, this increase in liquidity is offset by the reduction in trading volume generated by insiders. No evidence is found that the introduction of insider trading restrictions reduced the stock market's speed of adjustment to annual earnings announcements. Hence, the paper challenges the conventional wisdom that insider trading reduces liquidity and makes markets efficient
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This paper examines the effect of the introduction of insider trading restrictions on the behaviour of the Amsterdam Stock Exchange. From 1987 on, insiders were no longer allowed to trade two months before an annual earnings announcement and three weeks before a semi-annual earnings announcement. The results indicate that stocks became less liquid when insiders were not allowed to trade. Although the law may have increased the willingness of outsiders to trade before earnings announcements, this increase in liquidity is offset by the reduction in trading volume generated by insiders. No evidence is found that the introduction of insider trading restrictions reduced the stock market's speed of adjustment to annual earnings announcements. Hence, the paper challenges the conventional wisdom that insider trading reduces liquidity and makes markets efficient

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