Why Are Abnormal Returns after Insider Transactions Larger in Better Investor Protection Countries?

Finance

Further details

Using a unique data set of insider purchases in 15 European countries and the US, we find a positive relation between market reaction to insider trades and country-level shareholder protection. We propose that a different ability to extract private benefits of control across different shareholder protection environments changes the signal conveyed through insider trades to outside investors. The signal is both stronger and more precise in better investor protection countries. Our analysis provides new evidence that stronger shareholder protection is an important factor contributing to prices better reflecting fundamental firm values.

JEL classification: G14, G34

Keywords: Investor protection, Insider trades, Price informativeness