Essays on insider trading and enterprise risk management
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The dissertation investigates the informativeness of insider trading. Two primary questions are addressed. The first question is, are insider stock transactions informative of future stock price movements? An event study approach and an ex-post regression model are employed to examine the short-term market response to insider stock transactions traded at different levels of past stock performance based on insider trading data over the period 1996 to 2013. The dissertation is the first study to identify an “insider smile” suggesting that stock purchases by insiders earn greater abnormal returns following significant decreases and increases in stock prices; however, insiders earn only small abnormal returns from their stock purchases following small changes in stock prices. The results support that insiders are both contrarian investors and possessors of superior information about firm’s future stock price movements. Also, insiders in firms with higher levels of information uncertainty (smaller firm size and higher stock volatility) tend to earn greater abnormal returns from their stock purchases. The second question is, does enterprise risk management have effects on abnormal returns of insider trading? On the one hand, insiders in a firm with an ERM program are assumed to have better knowledge about operations and risks of the firm; thus, these insider stock transactions would earn greater abnormal returns. On the other hand, an ERM program may reduce information uncertainty of a firm and information asymmetry between insiders and outside investors. In this case, insiders in ERM firms would earn smaller abnormal returns from their stock transactions than insiders in non-ERM firms. The results show some evidence that ERM has negative (positive) effects on abnormal returns of insider stock purchases (sales) particularly for firms with higher levels of information uncertainty, which supports that an ERM program can benefit a firm from reducing information asymmetry between insiders and outside investors.