The purpose of this paper is to examine the insider trading strategy of corporations from the date of insider registration in relation to the earnings announcement of firms listed on the Stock Exchange of Thailand during the years 2003 to 2012. Corporate insider trading activity is measured in terms of stock trading volume, transaction frequency and stock trading value before and after earnings announcement. Abnormal returns on the day of the earnings announcement are used as a proxy for market responses to the announcement.
Using an event study approach, the results show that corporate insiders in Thailand buy and sell their own corporate shares in view of the positive market reaction to the announcement of good news. However, corporate insiders may not use the earnings announcement to make profits by entering or exiting their positions based on the inside knowledge of earnings information.
INTRODUCTION
Background and Motivation
All economic companies listed in the SET are required to submit/file quarterly and year-end financial statements as follows (Bor.Jor./Por.23-00). In practice, companies submit financial statements to the SET electronically through the Stock Exchange of Thailand's (SET) internal database. Therefore, the earnings content that is provided to the public is exclusively from the company itself, from the date of the earnings announcement.
Internationally, there is a link between insider trading and earnings disclosure, as described by Penman (1980). Penman (1982) shows that insiders have the ability to trade their own stocks and generate abnormal returns through joint trading and information dissemination activities. Therefore, this is an opportunity to investigate corporate insider trading in Thailand in relation to the mandatory disclosure of earnings forecasts.
Research Questions and Objective
In the Thai capital market, news announcements related to company earnings account for more than 60% of the overall news published in the Stock Exchange of Thailand (SET) since 2003 to trade and pool the profitability of insiders (corporate insiders and major shareholders). investigation of public news announcements for SET50 firms in the year 2002. Laoniramai (2007) uses more comprehensive data to find a relationship of insiders dealing with news announcement and abnormal returns during the announcement period. Results show that insiders in Thailand trade with private information and obtain abnormal returns from purchases.
So far, studies from Thai literature are limited to insider behavior around general news announcements as a whole. Nothing has been done to target the use of superior information on specific news announcements, although there are many significant results of them in developed markets (eg US or UK).
Contributions of the Study
LITERATURE REVIEW
- Insiders Trading Related to Information Disclosure
- Insiders Trading and Earnings Announcement
- Insiders Trade to Avoid Risk from Regulatory Actions
- Insiders Are Contrarian
- Insiders Trading in Thailand
Data on trading with Swedish insiders, one of the findings shows that insiders sell less on average before announcing bad earnings results. Penman (1982) shows that corporate insiders use private information to time their trades in relation to the date on which earnings forecasts are announced. Noe (1999) finds that managers use private information to trade heavily in their own stocks after the announcement of management's earnings forecasts than at other times.
Furthermore, several studies identify characteristics of insiders that they are contrarian and use private information to time their trades. This undoubtedly supports the fact that insiders are contrarian. 2004) investigate the profitability of insider trading in SET50 companies in the Thai stock market in the year 2002.
HYPOTHESIS DEVELOPMENT
- Data and Sample
- Study Event Time Line
- Definition of Test Variables
- Measurement of Insider Trade Imbalance
- Measurement of Stock’s Abnormal Returns and Returns
- Measurement of Firm’s Size
- Control Variables
- Methodology
- Event Study Method
- Regression Analysis
Empirically, there is a negative relationship between post-announcement insider trading imbalance and abnormal returns at the announcement. The pre-announcement net insider buying imbalance is positive when abnormal returns at the announcement are positive. Net insider buying imbalance before the announcement is negative when abnormal return at the announcement is negative.
Net insider purchases' post-announcement imbalance is positive when abnormal return at the announcement is negative. Net insider purchases' post-announcement imbalance is negative when abnormal return at the announcement is positive. Net insider purchases' imbalance is positive before and after the announcement when abnormal return at the announcement is positive.
The imbalance of net insider purchases is negative before and after the announcement, while the abnormal return at the announcement is negative. There is a positive relationship between the imbalance of insiders' net purchases before the announcement and the abnormal return during the announcement period. There is a negative relationship between the imbalance of insiders' net purchases after the announcement and the abnormal return during the announcement period.
Returns over the announcement period should be positive when the net insider trade imbalance is positive (i.e., for Hypothesis 5, a good news announcement is expected when insider buys before the announcement and also buys after the announcement. Therefore, positive returns over the announcement period are expected when the net insider trade imbalance before and after bad news announcements is positive (ie net purchase).
While for Hypothesis 6, bad news announcement is expected when insider sells before the announcement and also sells after the announcement. Consequently, negative returns over the announcement period are expected when net insiders' imbalance before and after bad news announcement is negative (i.e., net selling).
RESULTS AND ANALYSIS
Event Study
- Insiders Use Active Return Trading Strategy
- Insiders Use Passive Return Trading Strategy
- Insiders Buy Before and Sell After Good Earnings Announcement to Achieve an Active Trading Return
- Insiders Sell Before and Buy After Bad Earnings News Announcement to Achieve a Passive Trading Return
- Insiders Are Following-trend Trader. Insiders Buy Before and After Good Earnings Announcement
- Insiders Are Following-trend Trader. Insiders Sell Before and After Bad Earnings Announcement
By comparison, the abnormal returns upon annual earnings announcements are slightly larger (less than 0.18 basis points). To classify corporate insiders for a passive return strategy, abnormal returns on the firm's stock during the earnings announcement period must be negatively related to the net imbalances of insiders trading 40 days after the announcement period. The hypothesis explains that the abnormal return is negative, preceding a positive net insider trading imbalance (i.e., net buying).
After posting a good profit, there is a positive relationship of net buying activity when considering all profit quarters. Insiders engage in selling after the abnormal return falls during the announcement period for all announcements and quarterly earnings announcements. A study from this hypothesis suggested that corporate insiders trade within 40 days of earnings announcements.
However, when only the annual earnings announcement is considered, the results show significantly positive abnormal returns when the news type is classified as good news with the highest rate of 2.03%. The annual earnings announcement shows similar results between the bad news classification and the all news classification with the highest negative abnormal return (2.11%) according to NETFREQ. Insiders would sell before earnings are announced and reverse their position to achieve a passive return when bad earnings are announced.
For all earnings quarters, the results show a significant positive abnormal return for all imbalance trading insiders when good news is taken into account. However, the results show no correlation between insider trading and annual earnings announcements for all news types. When all earnings announcements are considered bad news, the results show significantly negative abnormal returns.
Multi-variate Regression Analysis
- Insiders Use Active Return Trading Strategy
- Insiders Use Passive Trading Return Strategy
A simple return during 120 days to 60 days before the earnings announcement date (PRIORRETb) is a control variable of insiders' contrarian trading behavior. The quarterly earnings announcement provides similar results, but with a lower degree of relationship (coefficient of BHAR is -4.5973). Nevertheless, for annual earnings announcement, the regression shows significant relationship with a high degree of coefficient of the abnormal return at the announcement (-17.4254).
Insiders would buy after a negative abnormal return from the earnings announcement (i.e. the market views the announcement as bad news) and insiders would sell after a positive abnormal return from the earnings announcement (i.e. the market views the announcement as good news). Notes: The Buy and Hold Abnormal Return (BHAR) is used as an indicator of market reaction on the day of the earnings announcement (day 0). The abnormal stock return of each firm is the closing price on the day after the earnings announcement (day 1) minus the closing price on the day before the earnings announcement (day -1) using the Thailand stock market index as the benchmark.
Three variables are used as proxies for insiders' Net Buy during 40-day and 2-day period before earnings announcement. Notes: Cumulative abnormal return (CAR) is used as a proxy of market reaction from earnings announcement day (day 0). Three variables are used as proxies for insiders' net sales during 40-day and 2-day period before earnings announcement.
Three variables are used as proxies for Net Insider Buying during the 40-day period and 2 days after the earnings announcement. Three variables are used as proxies for insiders' net sales during the 40 days and 2 days after the earnings announcement. Three variables are used as proxies for internal NetBuy during the 40-day and 2-day periods before and after the earnings announcement.
Three variables are used as proxies for insiders' NetSell in the 40 days and 2 days before and after the earnings announcement. Notes: Cumulative abnormal return (BHAR) is used as a proxy for market reaction on the day of the earnings announcement (day 0).
CONCLUSION
Company insiders, even if they know the past earnings information, may use or fail to use this information to take advantage of profits. Some groups of company insiders may use earnings announcements to achieve abnormal short-term trading returns. Other groups may use other types of news announcements, which may result in a higher trading profit for their benefits.
Overall, this research shows that significant insider trading relationships exist both before and after the earnings release period. This study may provide the basis for further research for both regulators and investors, as it is the first empirical evidence showing that corporate insiders in Thai companies trade based on prior knowledge of earnings information. Therefore, laws and regulations can be effectively imposed to prevent illegal insider trading in a certain period of time.
Or they can be used to regulate insider trading activities in order to increase market efficiency.
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Do insider transactions reflect both contrarian beliefs and superior knowledge about future cash flow realizations?, Journal of Accounting and Economics.
