A research article entitled “The performance of corporate legal insider trading in the Korean market” was published in the latest issue of the journal, International Review of Law and Economics. Authored by Paolo Mazza and Benjamin Ruh, the article discusses the aspects of Insider trading in detail. The article stresses data and analytics predominantly in the Korean stock market.
Insider trading has been judged for its legal and ethical parameters. An insider who trades in his or her own company is required to disclose their trades to the public in the given span of time.
The article found that Insiders have better market timing skills added with returns in comparison to simulated investors. Going deeper, the resulting research found that A-level insiders - CEOs and CFOs - performed well because they oversaw company operations. C-level Insiders - Board of Directors - also had more advantages because, while they did not oversee operations, any company information passed by them.
“The main difference between legal and illegal corporate insider trading is related to disclosure. In most markets regulating corporate insider trading, in order to abide by the law, insiders usually have a limited amount of time to disclose their trade to the regulator…”
In the second section of the article, researchers detailed the background of of their project. If the insider took their time in disclosing their trades or did not disclose them at all, it would be unfair to outside investors and create what the article refers to as ‘Information Asymmetry’.
Thanks to 2iQ analysts’ work extensively on Insider trades, the company’s data was incorporated into the research process:
…We construct our dataset using data obtained from 2iQ, a leading Insider Transaction data provider offering a global coverage of + 60,000 stocks. Our dataset covers a 10-year period ranging from January 2010 to December 2020. This data range is sufficiently large while not including major shocks such as the global financial crisis of 2008–2009.
Number of transactions/Year from 2010 to 2020.
The article details its results via graphs, tables and detailed information. The article also stressed focusing on purchases by Insiders over sales and other trade types. The reason for this is that while there are plenty of reasons for company member to sell their shares, there is usually only one reason for them to buy stock. This notion has also been used by 2iQ analysts many times in our previous blogs:
“As brought up in different academic papers treating this topic, focusing on buy transactions makes more sense because there is essentially only one reason for an insider to buy a stock: they believe in the future performance of the company. In comparison, there could be many underlying reasons to the sale of a stock, including market-wise irrational ones such as paying tuitions fees or buying a new car/house.”
The article predominantly focused on the Korean stock market. An interesting setting considering that, as the article says, Korea is a pioneering country to introduce and implement insider trading laws. It concluded with the possibility for more concise researches in the future:
“Avenues for future research could include an even more granular approach of the Korean market by investigating more precisely the impact of positions rather than including levels…
… A final research avenue that we also plan to investigate is the extent to which insiders, in the Korean market or elsewhere, suffer from potential overconfidence when they trade.”
The complete article is available for reading here.