Impact of Insider Trading on Share Returns: Evidence from Sri Lanka

Abstract

Insider trading is a crucial topic for investors in the stock market. This study investigates whether corporate insiders’ trading significantly affects the share returns of listed companies on the Colombo Stock Exchange (CSE). This research further examines the relationship between insiders’ purchases/sales and abnormal returns. This study examines the purchases and sales of insiders from randomly selected 37 listed companies from January 2012 to March 2022 using event study methodology, taking the announcement day as Day 0. A total of 97 transactions were used for this study. This study used the market model to calculate the alpha and beta coefficients of the risk-adjusted return for insider transactions. And t-values of Average Abnormal Return (AAR) and Cumulative Average Abnormal Return (CAAR) were calculated to determine the significance of the findings. This study found a positive and significant CAAR from Day 01 after the announcement day for insider purchases. A negative and significant CAAR was only for Day 01 afterward, a positive and not significant CAAR was found for insider sales. The study’s findings support that insider trading impacts the share returns at CSE. Further, this study observed positive CAAR for all insider transactions, meaning that the actual return is greater than the expected return for all insider transactions. Further, it revealed that the Sri Lankan stock market is immediately reacting to insider trading announcements, which is evidence for a semi-strong form of an efficient market hypothesis. However, it never showed any concrete evidence of information asymmetry in the market.