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[email protected] Does Cross-Listing Mitigate Insider Trading? Adriana Korczak and Meziane Lasfer Cass Business School, London
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Does Cross-Listing Mitigate Insider Trading?
Adriana Korczak and Meziane Lasfer
Cass Business School, London
Introduction• Evidence that insiders trade profitably around major
corporate events using private information– Bankruptcy protection: Seyhun & Bradley (1997)– New issues: Karpoff and Lee (1991) – Buybacks: Lee, Mikkelson & Partch (1992) – Earnings forecasts: Penman (1982)– Takeovers: Seyhun (1990), Bris (2005)– Dividend announcements: John and Lang (1991)– Exchange listings/de-listings: Lamba and Khan (1999)
• Evidence that insiders earn significant exceptional returns – US: Jaffe (1974), Finnerty (1976), Seyhun (1986), Lakonishok and
Lee (2001)– U.K: Pope et al (1990), Gregory et al (1994) & in other countries…
• But is Insider Trading profitable after transaction costs?
Issues: Should insider trading be regulated?
• What and How to regulate – Controversies:– What is insider trading and who is the insider– How to treat non-information trading (e.g., portfolio
changes, liquidity) and trading on miss-valuation
• Insider trading should not be regulated because: – It increases market efficiency, thus,
• Prices will reflect all information – Closer to strong form EMH• Signalling Buy (sell) trades to signal under- (over-) valuation
• Insider trading should be regulated because: – Trading on private information implies transfer of wealth– Decrease market efficiency through
• Reduction in liquidity• Informed investors set up strategies to mimic insider trades
Objective of the paper• Test whether cross-listing mitigates the trading on
insider information• The legal and reputational bonding hypotheses
• UK and US roughly same governance, thus not testing the bonding hypothesis as defined by (Cofee 1999, 2002; Stulz, 1999)
• Cross-listed companies are subject to both domestic and foreign Legislation
– US and UK are relatively complementary – Table 1
• Increased disclosure requirements• Less information asymmetries because more thorough investor
monitoring• Stronger bad image effects…
Cross-listing
• Parallel listing on domestic and foreign stock exchanges
• Particularly popular and widely investigated over the last 15-20 years
Listing venueDisclosure
requirementsCapitalraising
Rule 144A Portal Minimal compliance yes
ADR Level I OTC Partial compliance no
ADR Level II AMEX / NASDAQ /
NYSEFull compliance
no
ADR Level III yes
Data
• Source– Insider trading - Director Deals Ltd.– Cross-listing - BoNY, NASDAQ/NYSE/AMEX– Stock prices, accounting data and news -
Perfect Analysis
• Sample– 1999-2003– 928 UK companies (CL = 115, 12%)
– Total number of observations - NALL=13,529 (CL = 18%, BuyALL = 78% (CL = DL))
Description of the data (1) Table 2
Cross-Listed Cos(CL)
Domestically-Listed Companies (DL)
t CL – DLMann-Whitney
Panel B Fundamentals (Firm-Years)
Buy Trades Market Cap (£m) Dividend Yield M/B ROA
19,5125.007.780.03
4,8453.911.990.04
8715.172.310.02
1434.281.410.01
18.77-1.102.184.71
0.000.000.000.00
Sell Trades Market Cap (£m) Dividend Yield M/B ROA
18,0112.97
19.560.07
5,6422.453.070.07
6393.223.250.03
1702.402.250.02
10.27-0.941.78
11.41
0.000.360.000.00
Mean Median Mean Median
Description of the data (2) Table 2
Panel B Insider Trading (All Observations)
Buy Trades % Holding Shares Traded Trades per Day Top Management Trades Number of Observations
0.98% 0.01% 2.96
17.55 1,913
0.00% 0.00% 2.00
13.00 1,913
1.29% 0.10% 2.18
10.67 8,354
0.01% 0.01% 1.00 8.00
8,354
0.08 0.00 0.00 0.00
0.00 0.00 0.00 0.00
Sell Trades % Holding Shares Traded Trades per Day Top Management Trades Number of Observations
0.83% 0.15% 1.77 5.28 417
0.00% 0.00% 1.00 3.00 417
2.35% 0.40% 1.87 4.69
2,496
0.03% 0.04% 1.00 3.00
2,496
0.00 0.00 0.22 0.41
0.00 0.00 0.44 0.95
CL DLMean Median Mean Median t MW
Methodology• Event study methodology
– Event day [day 0]• Insider trading announcement date• Insider trading date
– Event window [-100; +100]
• Estimation window [-360; -101]
• News announcements
• Regressions – – OLS– To account for fundamental characteristics of cross-listed firms (Reese and
Weisbach, 2002; Doidge et al., 2004): Larger, higher growth and profitability • 2SLS and 2-stage Heckman estimation (Heckman, 1978)
Summary of the results
-0.10
-0.05
0.00
0.05
0.10
0.15
-100 -90 -80 -70 -60 -50 -40 -30 -20 -10 0 10 20 30 40 50 60 70 80 90 100
Buy Trades
CL
DL
DL
CL
Empirical Results
Cross-Listed (CL) Domestically Listed (DL)
Event periods CAR t CAR t tCL – DL
Panel A Announcement Day – All events
Buy trades – N 1,954 8,460 -100, -2 -0.083*** (-8.56) -0.066*** (-14.95) 2.04***
-1,+1 0.002 (1.03) 0.015*** (19.59) 7.22***
+2, +40 0.020*** (3.34) 0.043*** (15.52) 5.05***
+2, +100 0.019 (1.94) 0.073*** (16.68) 7.06***
Sell trades – N 426 2,532
-100, -2 0.099*** (5.78) 0.127*** (18.51) 1.73*
-1,+1 -0.003 (-1.12) -0.004*** (-3.44) -0.33 +2, +40 0.011 (1.05) -0.023*** (-5.37) -3.65***
+2, +100 0.014 (0.80) -0.053*** (-7.77) -4.08***
OLS Regressions
OLS Buy Sell
(1) (2) (3) (4)
CARs (+2;+100)
Constant 0.21*** (17.30) 0.20*** (15.76) 0.15*** (7.85) 0.16*** (7.75)
CL -0.06*** (-6.25) -0.06*** (-6.01) 0.06*** (2.94) 0.06*** (2.90)
Shares Traded 3.96*** (4.55) 3.96*** (4.56) 1.41*** (2.71) 1.42*** (2.73)
% Holding -0.07 (-1.21) -0.10* (-1.72) 0.01 (0.09) 0.02 (0.17)
Multiple Trading per Day 0.01 (1.35) 0.01 (1.16) -0.05*** (-3.83) -0.05*** (-3.78)
Top Management 0.03*** (3.41) -0.01 (-0.90)
Year Dummies Yes Yes Yes Yes
Industry Dummies Yes Yes Yes Yes
N 10,266 10,266 2,912 2,912
Adj. R2 0.07 0.07 0.18 0.18
Regressions – Selectivity BiasSelectivity Bias Buy Sell
PROBIT 2SLS HECKMAN 2SLS HECKMAN
(1) (2) (3) (4) (5)
CARs (+2;+40)
Constant -22.79*** (-52.51) 0.11*** (14.97) 0.31*** (17.49) 0.08*** (6.60) 0.25*** (7.92)
CL -0.11*** (-12.98) -0.36*** (-14.31) -0.05*** (-3.37) -0.26*** (-5.67)
0.25*** (13.92) 0.21*** (6.28)
Shares Traded 2.39*** (4.88) 2.38*** (4.88) 0.67** (2.32) 0.61** (2.13)
% Holding -0.02 (-0.62) -0.03 (-0.89) 0.05 (0.89) 0.05 (0.95)
Multiple Trading per Day 0.02*** (4.15) 0.02*** (3.98) -0.01* (-1.91) -0.01* (-1.95)
Top Management 0.00 (-0.30) 0.01 (1.25) -0.01 (-1.50) -0.01 (-1.41)
Market Cap 1.03*** (50.43)
M/B 0.00* (1.90)
Year Dummies Yes Yes Yes Yes
Industry Dummies Yes Yes Yes Yes
N 13,215 10,266 10,266 2,912 2,912
Pseudo R2 0.5387
Adj. R2 0.06 0.06 0.13 0.15
Robustness checks• Confounding events [-5, +5]
– Same results• Announcement day vs. Trading day
– Similar results– Announcement dates provide more information than
trading dates• Bull vs. bear markets
– Cross-listed companies: More information in bear period– More differences in domestically-listed firms
• Alternative event study methodologies– Same results using market adjusted model, mean
adjusted model…• Control sample – Size effect, similar results
Impact of News AnnouncementsPre-event – Buy trades
N All CL DL
All % CL CAR CAR CAR CL – DL
Panel A. Buy transactions
-40 to -2 All Board changes Results Forecasts Capital structure Restructuring Ownership General business Miscellaneous Other
21,885 1,837 5,436
615 3,414 2,987 1,766 1,129 2,350 2,351
35% 27% 24% 39% 44% 43% 24% 43% 37% 45%
-0.009 -0.001 -0.008 -0.131 -0.009 0.002
-0.004 0.002
-0.005 -0.007
*** *** *** *** * ** ** **
-0.006 0.005
-0.007 -0.047 -0.007 0.000
-0.011 0.001
-0.007 -0.009
*** ** ** *** *** ** ** **
-0.010 -0.004 -0.009 -0.184 -0.011 0.004
-0.003 0.003
-0.004 -0.005
*** * *** *** ** ** * * **
0.003 0.009 0.001 0.137 0.004
-0.005 -0.008 -0.002 -0.003 -0.004
** ** *** * **
Impact of news announcementsPost-event – Buy trades
N All CL DL
All % CL CAR CAR CAR CL – DL
Panel A. Buy transactions
+2,+40 All Board changes Results Forecasts Capital structure Restructuring Ownership General business Miscellaneous Other
19,152 1,551 2,606
607 3,903 2,536 2,009 1,287 2,481 2,172
40% 29% 36% 33% 47% 47% 27% 49% 37% 43%
0.005 0.009 0.005
-0.022 0.000 0.010 0.005 0.015 0.000 0.011
*** *** ** *** *** ** *** ***
0.001 0.006 0.001 0.011
-0.002 0.003 0.006 0.004
-0.004 0.004
** ** **
0.007 0.010 0.007
-0.039 0.003 0.016 0.005 0.025 0.003 0.017
*** *** *** *** * *** ** *** ***
-0.006 -0.005 -0.005 0.050
-0.005 -0.013 0.001
-0.021 -0.007 -0.013
*** ** *** ** *** *** ** ***
Impact of news: Pre-Sell trades
N All CL DL
All % CL CAR CAR CAR
CL – DL
Panel B. Sell transactions
-40 to -2 All Board changes Results Forecasts Capital structure Restructuring Ownership General business Miscellaneous Other
5,538
360 1,725
90 718 878 439 300 610 418
30% 27% 24% 39% 32% 31% 21% 32% 36% 48%
0.011 0.010 0.012
-0.012 0.014 0.017 0.003 0.023 0.001 0.009
*** ** *** *** *** *** **
0.006 0.003 0.006 0.031 0.003 0.009
-0.003 0.019 0.000 0.007
*** ** * ** ** **
0.013 0.013 0.013
-0.040 0.020 0.021 0.005 0.025 0.001 0.012
*** ** *** *** *** *** *
-0.007 -0.009 -0.007 0.071
-0.017 -0.012 -0.008 -0.006 -0.002 -0.005
*** ** ** *** ** *
Impact of news: Post-Sell Trades
N All CL DL
All % CL CAR CAR CAR
CL – DL
Panel B. Sell transactions
+2,+40 All Board changes Results Forecasts Capital structure Restructuring Ownership General business Miscellaneous Other
4,913
366 871 135 906 723 534 297 674 407
34% 23% 38% 39% 39% 34% 21% 25% 36% 42%
-0.001 -0.001 -0.001 -0.014 -0.004 0.006 0.001 0.011
-0.008 -0.005
** ** ** **
-0.001 -0.001 0.008
-0.031 0.001 0.006 0.000 0.004
-0.014 -0.009
** *** ** *** **
-0.001 -0.001 -0.006 -0.003 -0.007 0.006 0.001 0.014
-0.005 -0.002
** ** **
0.000 0.000 0.014
-0.029 0.008 0.001
-0.001 -0.010 -0.008 -0.007
** * **
Good News Bad News
(1) (2) (3) (4)
IT up to Constant -0.17*** (-74.73) -0.15*** (-72.24) -0.09*** (-71.94) -0.08*** (-65.54)
20 days CL 0.04*** (7.83) 0.03*** (7.84) 0.01*** (3.78) 0.01*** (3.88)
prior to |CAR| News × CL -0.34*** (-3.07) -0.15** (-2.06)
news |CAR| News -0.04 (-0.92) 0.01 (0.27)
release |CAR| Board Changes × CL -0.74* (-1.90) -0.66 (-1.38)
|CAR| Board Changes 0.05 (0.48) -0.11 (0.89)
|CAR| Earnings × CL -1.11*** (-3.56) -0.37** (-2.12)
|CAR| Earnings -1.01*** (-6.60) -0.31*** (-3.61)
|CAR| Forecasts × CL 0.44 (0.71) 0.33 (0.84)
|CAR| Forecasts -0.76** (-2.06) -0.38 (-1.36)
|CAR| Capital Structure × CL -0.01 (-0.08) -0.07 (-0.65)
|CAR| Capital Structure 0.16** (2.54) 0.10** (1.96)
|CAR| Restructuring × CL 0.03*** (2.76) -0.01 (-0.05)
|CAR| Restructuring 0.04 (0.46) 0.08 (1.67)
|CAR| Ownership × CL -0.03 (0.12) 0.00 (0.03)
|CAR| Ownership 0.10 (0.83) 0.10* (1.73)
|CAR| General Business × CL 0.09 (0.40) -0.55* (-1.73)
|CAR| General Business 0.05 (0.43) 0.16*** (3.08)
|CAR| Miscellaneous × CL -0.28 (-1.10) -0.11 (-0.68)
|CAR| Miscellaneous -0.07 (-0.57) 0.03 (0.42)
|CAR| Other × CL 0.04 (0.02) 0.12 (1.01)
|CAR| Other 0.07 (0.75) -0.05 (-0.75)
N 26,369 26,369 27,951 27,951
Pseudo R2 0.01 0.03 0.00 0.02
Conclusions• Insiders are informed investors because
– They are contrarians: Negative (Positive) CARs before buy (sell) trades
– Positive (negative) CARs after buy (sell) trades
• Significant differences between cross-listed and domestically-listed companies– Abnormal returns and – news impacts
• are significantly smaller for cross-listed firms
• Implication:– bonding contract limits the propensity of insiders to trade on
insider information • Coffee (1999), Reese and Weisbach (2002), Doidge (2004) and Doidge,
Karolyi and Stulz (2004)
Questions
• Why do managers still trade before news is announced, despite the legal constraints?– Is the bonding contract not binding?
• King and Segal (2004), Segal (2005) and Licht (2003)
– Use other markets• US domestic vs. UK cross-listed companies• Other cross-listed companies in US
– Use other news, especially financial analysts forecasts
• Market micros-structure effect – Bid-ask spread – adverse selection problem
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