Are Directors' Dealings Informative?

Evidence from European Stock Markets

Kaspar Dardas* European Business School Andre Güttler† European Business School

Abstract Are directors' dealings reports informative for outside investors? We analyze short-term announcement effects for 2,782 companies from eight European countries between 01/2003 and 12/2009. We find significant announcement effects in four out of eight countries after directors' dealings reports have been disclosed. For most countries the magnitude of the announcement effect depends on transaction size, firm size, book to market ratio, and multiple trades by different insiders on the same trading day. The results are stronger for purchases than for sales. For France, Ireland and Sweden we find tentative evidence that the corporate position of an insider is connected to the size of the announcement effect.
JEL classification: G14, G15

Keywords: Directors' dealings, Market Abuse Directive, Insider hierarchy, R&D intensity

Department of Finance, Accounting and Real Estate, EBS Business School, Gustav-Stresemann-Ring 3, 65189 Wiesbaden, Germany, E-mail: kaspar.dardas@students.ebs.edu, +49 173 305 8889 (Corresponding author). † Department of Finance, Accounting and Real Estate, EBS Business School, Gustav-Stresemann-Ring 3, 65189 Wiesbaden, Germany, E-mail: andre.guettler@ebs.edu We thank an anonymous referee for very helpful comments. We also thank 2IQ Research for providing the data for our analysis. Any remaining errors are our own.

*

In the past decade, the use of directors’ dealings reports in stock analysis has become common practice among financial professionals. The rationale behind it is that substantial information asymmetries exist between company insiders and outside investors.1 Since insiders are involved in the day-to-day business of a company, they are expected to be better informed about the true value of their company’s assets than any other investor. Thus, whenever insiders trade stocks of their company, they are assumed to be revealing new information. We investigate whether directors’ dealings reports are informative for outside investors. We analyze short-term announcement effects for 2,782 companies from eight European countries, namely Austria, France, Germany, Ireland, Italy, the Netherlands, Sweden, and the U.K, with an observation period between 01/2003 and 12/2009. Our main findings show that there are significant announcement effects in four out of eight countries after directors’ dealings reports have been disclosed. We find that the magnitude of the announcement effect is higher for purchases than for sales. We also conclude that the magnitude of the announcement effect depends heavily on transaction size. Factors such as firm size, book to market ratio, or multiple trading by different directors on the same day have an influence on announcement effects. For France, Ireland and Sweden we find tentative evidence that the corporate position of an insider is connected to the size of the announcement effect. Moreover, we show that in some countries the recently implemented Market Abuse Directive had a noticeable effect on the information content of directors' dealings. We further conclude that directors’ dealings reports lead to largest announcement effects in the healthcare and energy sectors. Previous studies based on directors’ dealings reports show that company insiders generate abnormal returns by trading stocks of their company (e.g. Seyhun (1986), Rozeff and Zaman (1988), Lin and Howe, (1990), Lakonishok and Lee (2001)). Others focus on the long-term abnormal returns generated by company insiders. For instance, Rozeff and Zaman (1988) examine whether outsiders are able to earn abnormal profits by mimicking insiders. Since the information on the insider trade takes some time to reach the market, they conduct the outsider performance test by imposing a two-month trading lag when creating the outsider portfolios. They find that outsiders are indeed able to generate

We use the terms “insiders” and “directors” interchangeably unless stated otherwise. Thus, we do not follow the strict U.K. definition of “directors” but rather refer to all company insiders whenever using the term “directors”.

1

1

abnormal returns. However, after including transaction costs, the outsider profits disappear entirely. In contrast, by using U.S. data Bettis, Vickrey, and Vickrey (1997) show that outsiders are able to make significant profits. They measure weekly abnormal returns by using large-volume insider trades as event triggers and find that outsiders are able to make statistically and economically significant abnormal returns net of transaction costs for holding periods that are longer than 13 weeks. Specifically, they report an abnormal return of 6% for a holding period of 26 weeks.2 More-recently published studies focus on the immediate effects of insider trading around announcement and/or trading days. Lakonishok and Lee (2001) examine a five-day period after the announcement as well as after the trading day for U.S. stocks. Only for trades by insiders of small capitalization firms do they detect an abnormal return of 0.93% subsequent to the trading day. Friedrich et al. (2002) examine short-term daily returns following the trading days of insiders for the U.K. They do not find evidence that outsiders are able to earn economically significant returns net of transaction costs. Previous research on directors’ dealings is mostly concentrated on the U.S. and U.K. This is obviously due to the long history of insider regulation in both countries. The existence of announcement effects is undisputed in both countries. However, research on directors’ dealings in continental Europe shows mixed results. Klinge et al. (2005), Stotz (2006), Dymke and Walter (2008), and Betzer and Theissen (2009) find significant abnormal returns based on directors’ dealings in Germany. On the other hand, Eckbo and Smith (1998) do not find any effects in the Norwegian stock market. Del Brio et al. (2002) find that insiders are able to earn abnormal returns in Spain. For the Italian market, Bajo et al. (2006) observe that abnormal market performance occurs after an insider’s transaction, usually between the first and the third month after the insider trade. Zingg et al. (2007) find that outsiders who mimic small insider transactions can earn abnormal returns in the Swiss stock market. For the Netherlands, Degryse et al. (2009) find significantly positive abnormal returns after purchases by directors and supervisory board members.3 Recently, two studies examine insider dealings in a broad selection of countries. Fidrmuc et al. (2010) investigate the dependence of market

2

For long-term studies, which examine portfolios based on insider trades see Jeng et al. (2003) for the U.S. and Giamouridis et al. (2008) for the UK. 3 See also Kallunki et al. (2009), who investigate the motives of Swedish insiders to trade stocks of their firms.

2

price reaction to insider transactions and corporate governance in 16 countries. They find that market reaction to insider purchases is larger in countries with good corporate governance. Aussenegg and Ranzi (2008) examine the market reactions to directors’ dealings reports in seven European countries of German and French legal origin.4 They show that information asymmetries between insiders and outsiders are stronger in German law than in French law countries. In both of the above cross-country studies, the authors pool countries based on their legal origin and investigated market reactions of these pooled samples. This paper contributes in the following ways to the existing literature. First, with regard to other cross-country studies on legal insider trading we focus our analysis on single countries and not on pooled country samples. This study structure allows us to control for country-specific regulatory changes, which have been implemented during our observation period. Specifically, the E.U. Market Abuse which aims to harmonize financial markets across Europe. Thus for each country from our data sample, we give a short overview on the regulatory changes with respect to directors' dealings and test whether these changes had an effect on the information content of directors' dealings reports. Moreover, we want to show in which countries and under which conditions directors’ dealings reports are most informative. To give a clear answer as to whether directors’ dealings announcements are informative or not, we see the need to investigate each country individually. After all, outside investors purchase/sell stocks in single country exchanges and not according to factors such as the legal origin of a country. Our parallel structured cross-country analysis is also unique in its detailed examination of the insider hierarchy hypothesis, which states that the corporate position of an insider causes different announcement effects. This is aided by our data quality, which allows us to identify the insider position for each single transaction. To the best of our knowledge, the insider hierarchy hypothesis is unexplored for most of the countries in our study.5 Second, we put a strong emphasis on the comparability of results between each country in our analysis. A remarkable aspect of most European studies is that results are often compared to the results from benchmark studies of the U.K. or U.S. (e.g. Dymke and Walter (2008), Degryse et al. (2009)). Yet in the U.K. and U.S. papers, the
Aussenegg and Ranzi (2008) classify countries according to the legal origin as defined by La Porta et al. (1998). 5 The insider hierarch hypothesis has been previously examined for the U.K. by Fidrmuc et al. (2006) and for Germany by Dymke and Walter (2008) and Betzer and Theissen (2009).
4

3

and analogous eventstudy variables.K. They find that market reactions to insider trades are mostly influenced following the news of mergers and acquisitions. Section I gives a short overview of the directors’ dealings regulations in Europe. The comparability of event-study results obtained from different observation periods is problematic because event studies are affected by time-varying idiosyncratic risk. our paper analyses announcement effects for different markets with almost identical time periods. The 1985 Companies Act. market. Therefore. was the first country in Europe to implement insider trading laws. we examine which industry sectors show highest announcement returns to directors’ dealings reports in European stock markets. 6 4 . Third. I.K. It required the immediate reporting of insider transactions. For instance. For a study on illegal insider trading (in credit derivatives markets) see Acharya and Johnson (2007). Section II derives our main hypotheses from previous literature.6 Finally. a comparison of event study results from substantially different observation periods might lead to erroneous conclusions.S. The U. no later than the fifth business day after an insider trade has been made. it had a narrow definition of who is considered a company insider. enacted in 1985 extended this regulatory framework. The power and specification of event studies is consequently not stable through time. which allows an unbiased examination of announcement effects for each single country. Section IV analyzes the results and Section V concludes the paper. For that reason. which is also novel to the literature. Section III describes our data and methodology. we exclude transactions related to mergers and acquisitions and any other type of transaction that might distort a clear examination of the announcement effect. In addition.. (2006) investigate the impact of news releases prior to directors’ transactions for the U. the reporting duty of directors' dealings has a long tradition with legislation in place since 1934.event studies are applied over substantially longer and different observation periods than in (Continental) European studies. due to the quality of our dataset we were able to use only pure buy and sell transactions.7 The rest of the paper is organized as follows. 7 Whenever we use the term “insider trading” we refer to legal insider trading unless stated otherwise. with the implementation of the 1977 Model Code. Only Fidrmuc et al. Its history of regulating directors’ dealings goes as far back as 1979. European Regulation on Directors’ Dealings In the U. identically constructed benchmark indices.

regulator requires a two-month trading gap prior to final and interim earnings announcements. 10 The release date of 89/592/EEC is 13/11/1989. A remarkable characteristic of the U. management or supervisory bodies of the issuer.10 This was the first adoption of a directive by the European Parliament to control for insider trading across all European capital markets.8 Most other European countries did not implement directors’ dealings regulations before the 1990s.U. directly or indirectly.K.executive board members and non-executive directors were required to report their trades. having regular access to inside information relating. art. 1(1). regulation was and still is the existence of extensive blackout periods.. (1990) and Fidrmuc et al.000 euros in a calendar year.12 Furthermore. the effective date is 01/06/1992. 12 According to 2004/72/EC. the more comprehensive Market Abuse Directive 2003/6/EC (2004/72/EC) replaced it. as well as their families and institutions that are associated with these persons. price. 9 See also Gersbach and Nedwed (1991) who present arguments for and against regulations on insider trading. see Pope et al. and the power to make managerial decisions affecting the future developments and business prospects of this issuer. to the issuer. It gives detailed requirements on directors’ dealings reporting standards. directive requires companies to report the names of all insiders by the issuers and to update this information regularly. the E. who is not a member of the bodies as referred to in point (a). All member states can implement a 5. the U. small transactions only have to be reported if the accumulated transaction size exceeds 5. this directive gave each member state a wide range of freedom concerning the implementation and enforcement of insider trading laws. The directive also defines the people who are obliged to report transactions. which is currently valid for all European Union states. 11 The Commission Directive 2004/72/EC is an extension of the Market Abuse Directive 2003/6/EC. The member states must ensure that directors’ dealings reports are made within five business days and contain crucial information such as size.9 Moreover.” 8 5 . (b) a senior executive.000-euro notification barrier. In 2007 another directive which aims to improve reporting standards and harmonize For a detailed overview of insider trading regulations in the U. are required to report their transactions. whereas large shareholders were excluded from reporting. In 2004. In particular.K. The implementation of the Council Directive 89/592/EEC in 1992 brought a change to these inconsistent regulations. all European countries regulated insider trading differently in terms of the definition of an insider and inside information. (2006). In particular.11 The Market Abuse Directive. Nevertheless. all persons in managerial positions. requires all members to establish minimum standards for regulating insider trading. and the characteristic of the transaction. a “person discharging managerial responsibilities within an issuer shall mean a person who is (a) a member of the administrative. Thus.K.

was implemented. it also implies an increased demand for reporting standards on directors' dealings. However.europa.eu/internal_market/securities/transparency/index_en. then investors should react quickly. The Transparency Directive mainly focuses on shareholding disclosures and periodical financial reports. we examine the following hypotheses. however. for countries such as Austria.K. Therefore.htm. We expect share prices to adjust within several days after the buying/selling signals have been given to the market. Hypothesis 1: The announcement of purchases (sales) by insiders leads to immediate positive (negative) abnormal returns in the underlying share.13 II. This so-called Transparency Directive 2004/109/EG (2007/14/EG) requires each member state to ensure that there is at least one officially appointed mechanism for the central storage of regulated information. 13 6 . for instance the directives brought only relatively small changes regarding the regulations on directors' dealings because both countries had well-established regulatory frameworks beforehand. If insiders are indeed able to identify whether their company is over-/undervalued and if insiders give clear signals to the market by buying or selling stocks of their company. Germany and France the Market Abuse Directive changed the regulations on directors' dealings fundamentally and improved the reporting standards significantly (see Table I). Moreover. For the U. See Mazars (2010). Hypothesis Development Our approach is to examine the short-term abnormal returns within a five-day period subsequent to the announcement of an insider transaction.U.financial reporting within the E. European Commission web page on the Transparency Directive:http://ec. the European Commission web page on the Market Abuse Directive: http://ec. It is noteworthy that for some countries the Market Abuse Directive had a strong impact on the legal framework with regard to directors’ dealings whilst for others it had almost none. Table I documents the official implementation dates of the Market Abuse Directive 2003/6/EC as well as the Transparency Directive 2004/109/EG in each country from our data sample. it states that issuers must ensure appropriate transparency for investors through a regular flow of publicly available information and that corporate fillings have to be reported electronically with an easy access by end users.eu/internal_market/securities/abuse/index_en. and Ireland.htm.europa.

We proceed by examining the relation between an insider’s position in the company and the size of the announcement effect. on first sight. These. Hypothesis 3: The announcement of trades by top-level executives will result in stronger reactions in the market than the announcement of trades by other directors. Fidrmuc et al. Betzer and Theissen (2009) obtain similar results for the German market. To see whether this is also the case for the countries in our data set we test each country for the so-called insider hierarchy hypothesis. However. 15 See also Jeng et al. (2006) show that abnormal returns following the announcements of top-level executives in the U. (2003). It is rational to assume that top-level executives should have an advantage over low-level executives in obtaining relevant information about changes in the firm’s value. counterintuitive results might be explained by the fact that top-level executives are followed more closely by regulatory authorities and therefore trade at less informative moments. 7 . we assume that announcements of large transactions give stronger signals to the market than announcements of small transactions.Fidrmuc et al.K.1% of the volume of shares outstanding. 14 Fidrmuc et al. (2006) as well as Betzer and Theissen (2009) define large trades when the trading volume exceeds 0. (2006) report higher abnormal returns for large transactions than for small transactions in the U. Hypothesis 2: The announcement of large purchases (sales) by insiders leads to larger positive (negative) abnormal returns than the announcement of small purchases. are significantly lower than following the announcements of other directors.K. Market reactions should be stronger following the announcement of trades made by high-level executives than by low-level executives.14 Following these findings.15 Dymke and Walter (2008) obtain similar results for the German market.

we assume that multiple purchases (sales) by several insiders on the same day will give a stronger signal to the market than a single transaction by one insider. Therefore. The rationale behind it is that information asymmetries are higher in R&D-intensive firms due to the uncertainty of the outcome of R&D projects. We believe that the announcement effect increases with the number of insider transactions. Aboody and Lev (2000) showed that insiders gain higher returns in R&D-intensive firms than in firms with less R&D.S. For the U. A final investigation concentrates on industry sectors. Lakonishok and Lee (2001) conclude that directors’ dealing announcements for small capitalization firms show a significantly larger market reaction than in the case of large firms. such as consumer goods.. We assume the same for our data and therefore we state the hypothesis: Hypothesis 5: The announcement of insider purchases (sales) in small firms leads to larger positive (negative) abnormal returns than the announcement of insider purchases in large firms. Since analysts follow small firms less closely than they follow large firms. 8 . Aussenegg and Ranzi (2008) also find a reverse relationship between abnormal returns after trade announcements and firm size for several European countries. Hypothesis 4: The announcement of multiple purchases (sales) by different insiders on the same day leads to larger positive (negative) abnormal returns than the announcement of single purchases.In addition. Previous studies have shown that firm size in terms of market capitalization has a substantial influence on the announcement effect. This lets us assume that insiders might gain higher returns in R&D-intensive sectors such as healthcare and IT compared to sectors that are less R&Dintensive. the information asymmetry is larger for small firms. the possible new information that a directors’ dealings report contains about a small firm is more significant than in the case of a large firm.

transaction type (11 different types). adhoc news portals or directly from company websites and enhanced with qualitative research. a data vendor that specializes in European insider trading.95%) and subscriptions (1. some transaction types are marked with 14 characteristics that further specify each transaction. tax liability related.K. exercises (5. we dropped planned. which we will describe below. since these transactions decrease the announcement effect almost to zero. In addition. which leads to an exclusion of this transaction from our study. and the U. Descriptive Statistics. announcement date. 2003 and ending on December 31. insider name. 2009. Each single transaction has been researched for relevant company news around the transaction day and marked accordingly. This allows us to examine the most extensive data sample. (2006) point out the importance of controlling for merger related transactions. trade date. Germany. Whereas the source data is downloaded from stock exchange internet pages. and Methodology Our data on directors’ dealing reports come from 2iQ Research.87%). merger related. or remuneration. trade size. a sell transaction might be marked as “tax related”. The most common transaction types in the original dataset (before filter rules are applied) can be categorized as buys (55. First. the Netherlands. The original database contains a total of 151. A. sales (33. Ireland. Fidrmuc et al. 9 . a private placement. Data Sources Data Sources. which includes all countries.91%). France. We applied strict rules to modify this initial dataset.989 insider transactions in exchange-listed companies from Austria. Italy. capital increase related. and security type (10 different types). insider position. This unique data quality allows us to filter only pure buy and sell transactions for each single country. beginning on January 1. Each transaction includes information on company name. In particular. Sweden.93% of all transactions). a dividend reinvestment. These characteristics identify whether a buy/sell transaction is option/award/plan related. We chose (with a few exceptions) the same observation period for each country. III.Hypothesis 6: The announcement of insider purchases (sales) in R&D-intense sectors leads to larger positive (negative) abnormal returns than the announcement of insider purchases (sales) in sectors with a low R&D intensity. For instance.

tax related. for about 5% of the transactions described above.64% of the original observations (89.125 transactions).46% of the original observations to 110. and shares outstanding are obtained from Compustat. The amount reinvested is the entire dividend distributed to individuals resident in the country of the company. These filters decreased the sample to 72. we dropped security types such as ADRs. book values. but does not include tax credits. Second. we dropped all transactions that are not in the currency of the respective domestic exchange. dividend reinvestments. unless they are controlled by an insider and aggregate multiple transactions by the same insider on the same day. Based on this aggregation we define the total traded volume of an insider as a net purchase or sale.907 observed transactions. subscriptions. we dropped all issuer-based transactions and transactions that were reported 20 calendar days past the transaction date. neutral.16 These rules decreased the data sample to 58. merger related. Table II gives a detailed overview of this final data set. bonds. Therefore. and compensation transactions. We also use the Compustat database to track any changes in company names. since we believe that these directors’ dealing reports attract only minimal attention in the markets.000 euros. 17 “Gross” refers to the maximum possible dividend reinvestment. some transactions are not reported within the required five business day range. we dropped all observations where the transaction price deviated by more than 20% from the securities’ closing price on that day. For each country we use the country-specific (Gross) MSCI Barra Performance Share Indices to calculate risk-adjusted returns. and stock swaps and kept only ordinary shares.private. This rule mainly eliminated transactions such as exercises. the difference between reporting and transaction day is longer than 20 calendar days. Moreover. This reduced the dataset to the final sample number of 44. This rule further minimizes the likelihood that private or compensation-based transactions are included in the sample. which represents 29. dividend related.52% of the initial sample.128 transactions. or exercise related sales. Furthermore. 16 10 . We also excluded transactions made by investment firms as well as funds. most European countries did not have any requirements for timely reporting of directors’ dealings (see also Table I).17 All transactions are converted into euros for non-euro countries using the daily exchange rate of the announcement date from Compustat. Before the implementation of the Market Abuse Directive 2003/6/EC. Daily share returns. Even after the implementation of the directive. Furthermore. options. To avoid unnecessary noise we excluded transactions with an aggregated trade volume of less than 1.

There are several possible reasons why the average trade numbers vary between countries. the U. the subsequent purchase of the underlying shares. and Ireland. Similar to Lakonishok and Lee (2001) and Fidrmuc et al. Italy. (2006). and exercises. The biggest difference in (relative) insider trading frequency is between Germany (average 3. Descriptive Statistics Table III shows the descriptive statistics for our initial data sample. A counterexample of a country with a narrow insider definition is Ireland.60 trades per firm and year) and Italy (average 8. where a specific relationship between a public official and a company must exist for the public official to be considered an insider. and Sweden seem to have extremely active insider trading. such transactions are mostly reported as single sell transactions with a short note in the report that states that the transaction is option related. sales.54 trades per firm and year). In the Netherlands. option related sales. reported in Table III are consistent with the trade frequencies reported by Fidrmuc et al. In Germany. and the sale of these shares.B. and the U.K. have the lowest average trading frequency of all countries. which artificially inflates the number of transactions.. Ireland. for instance. This becomes evident when considering that all public officials in Italy are defined as insiders whenever their responsibilities allow them to obtain inside information. (2006). Sweden and the Netherlands have a detailed accounting style of reporting insider transactions. has the broadest definition of insiders among all European countries. Furthermore. the Italian legislation does not differentiate between the The (relative) trading frequencies for the UK. Second. resulting in different numbers of people acting as insiders. there is a technical issue concerning how insider trades are reported in certain countries. First. the Netherlands. This is even the case when the officials do not have a specific relationship to a company. for instance.K. Italy. the legal definitions of insiders vary across countries. we calculate the (relative) trading frequencies per firm and year for each country. Countries that have a wide definition of insiders will consequently have more persons acting as insiders and thus have a higher number of insider trades. an option exercise followed by the sale of the underlying shares is reported as three transactions in separated reports: the exercise of options.18 Directors in Germany. which includes net purchases. On the other hand. 18 11 .

K. a waitress who overhears a non-public conversation between two directors is already defined as a secondary insider. or the above-mentioned public officials. COO. According to Faccio and Lang (2002). in which transactions are sorted into three classes according to the corporate position of the insider who performed the transaction. art.32%).19 Third. 2 (1) (b) defines all persons who are large shareholders as insiders. which further indicates the wide definition of relevant insiders (Alexander (2007)). On the other hand. Therefore. CFO. Both countries also show the lowest average insider-trade numbers in Table III. Secondary insiders are any persons having inside information. the reported number of trades per firm and year will be higher than in a country that has a narrow definition of insiders.K. On the other hand. managing Primary insiders are defined as persons who obtain inside information because they are employees. We grouped corporate positions into insider classes based on two criteria: the day-to-day business involvement of an insider and the ability of an insider to make strategic decisions in the company. Officer. countries with ownership structures that mostly consist of widely held firms must have fewer insiders per firm and therefore less insider trading. families. President.20 On the other hand. Table IV shows the respective descriptive statistics. For instance. On the one hand. This is especially true for Italy. A country with an ownership structure that includes many publicly traded firms controlled by the state. large shareholders.08%) and Ireland (62. where it can be observed that insiders tend to buy stocks in several tranches within consecutive days. or other financial firms will consequently have a large circle of people who are defined as insiders. It must be noted that the legal definition of insiders falls into the discussion on illegal insider trading. Chief Information Officer. 20 Directive 2003/6/EC. We further examine all transactions in our sample categorized by insider position. Deputy CEO. in Germany or the U. the highest proportion of widely held firms in Europe is in the U. the ownership structure of a country might have some relevance for the trading frequency of insiders. (63. It is important to note that “persons” must be understood as natural persons as well as legal entities. not only persons who have a direct relationship with the company are considered as insiders but all executives of related companies as well. • Insider class A: CEO. • Insider class B: Divisional/regional CEO. and similar corporate positions as well as respective family members. non-executive vice-chairman. Chief Scientific Officer. However. Finally. chairman (also non-executive). we assume that the information content of directors’ dealings reports will be lower in countries with a wide insider definition since less informed insiders will report transactions with low relevance to the market. CEO of subsidiary. 19 12 . we believe that a wide definition of insiders such as in Italy will have two consequences. Vice President.penalties for primary and secondary insiders. insiders place their positions in single transactions on a single day. the trading methods carried out by some insiders explain the variation in trading frequencies.

more purchases (30. Panel B reports the same with 4. (2006). Purchase transactions. and similar corporate positions as well as respective family members. Methodology We conduct our study by separately analyzing short-term announcement effects in each single country.677). for sales all insider classes have about the same trading volumes. Nevertheless. due to cross-country income inequalities and differences in spending we regard a relative threshold as being superior over an absolute threshold. 13 . supervisory board member. Panel A reports the same for purchases (12. However.1) as well as longer event windows. To assess the information content of insider trade announcements we examine the cumulative average abnormal returns (CAARs) of the announcement day and the subsequent day CAAR(0. however. technical manager etc. we define large transactions as all net purchases and sales that represent at least 0. The explanation for the disparity between sales and purchase volumes is that insider sales are often liquidations of large remuneration packages. divisional/regional director and similar corporate positions as well as respective family members.373 (1. CAAR(0. upper management of subsidiaries.576 purchases versus 4. company secretary.director.). Panel A of Table IV shows the statistics for all transactions. lower class executive (sales director. and CAAR(-20. C. board of auditors.107 sales. upper management. group director. (2006)). These results are consistent with previous studies (e.878) were made by insiders than sales (14. • Insider class C: Non-executive board member. 21 A threshold relative to a firm’s market capitalization has an obvious bias towards small-cap firms since spending on the firm’s own shares will not rise evenly with the market capitalization of the firm. former CEO/executive/board member.21 According to Panel A. CAAR(0. which are only fractions of these remunerations packages. while Panel B refers to large transactions.1% of shares outstanding. executive director. in both panels the average mean and median for sales is significantly larger than for purchases. According to Panel B.-1). are private investments made by the insider. (non-executive) director.029).20). Betzer and Theissen (2009) and Fidrmuc et al.4).g. Similar to Betzer and Theissen (2009) and Fidrmuc et al.701) purchases (sales). however. most active insiders are top executives with 2.

Moreover. We employ a 41-day event window centered on the announcement day. Specifically. Third. it does not require normally distributed abnormal returns.To calculate the CAARs and test for their significance. We define the event date as the announcement date of the transaction and proxy the market return by the corresponding (Gross) MSCI Barra Performance Share Index for each country. The choice between J1 and J2 depends on the variance of the securities with higher abnormal returns. First. the CDAX for Germany. based on Campbell et al. If event windows overlap. we calculate CAARs from a modified data sample that is free of event window clustering.K. However. if event windows do not overlap the covariance between securities will be zero and the variance of aggregated cumulative returns can be calculated without any concern about the correlation of securities. The non-parametric test statistic as proposed by Corrado (1989) has several advantages over parametric tests. We use a conservative approach to test the statistical significance of our results and therefore report only the lowest absolute value of the t-statistics described above. it is robust in the presence of event clustering or event-induced increases in variance. (1997). which affects the variance of the aggregated cumulative returns. we also calculate CAARs with different all share indices. for France. we apply three other robustness checks to confirm our results and to control for possible thin trading problems in small capitalization stocks. we use three parametric and one non-parametric test statistics to examine whether CAARs are different from zero. (2006). Second. single securities will be correlated. J1 and J2. we apply a standard event study approach (MacKinlay (1997)). 22 14 . we apply the test statistics tCAAR based on Barber and Lyon (1997). Similar to Fidrmuc et al. which is Student-t distributed with N-1 degrees of freedom. For instance. Finally. Germany. The beta is estimated over a period of 200 to 21 trading days prior to the announcement day. In particular. Furthermore. J1 is preferred whenever large abnormal returns occur in securities with high variance. the SBF250 for France.K. Sweden and the U. the OMX Stockholm for Sweden and the FTSE all share index for the U.22 In none of the modified samples MacKinlay (1997) points out the importance of using non-overlapping event windows to calculate the aggregated cumulative abnormal returns. The presence of event window clustering might lead to erroneous results in parametric tests. we repeat our study by using market-adjusted returns with the respective (Gross) MSCI Barra Performance Share Index as the benchmark index. J2 is preferred whenever abnormal returns are constant across securities. we apply a non-parametric test statistic trank based on Corrado (1989).

For Sweden (1. we found significant results.4). The highest CAARs(0. we observe positive abnormal returns after purchase announcements and negative abnormal returns after sell announcements. Sweden.K.1) is reported for Italy (0. Due to the magnitude of these CAARs. the CAARs(0.1) are reported for Ireland (5.1) and CAARs(0.K.11%).12%).4) in all countries besides Austria and the Netherlands. we find that CAARs(0. As hypothesized. we see our results not only as statistically but also as economically significant. however.1) are positive and significantly different from zero in five countries. we conclude that transaction size indeed plays a crucial role in the size of We construct the data sample that is free of event window clustering by eliminating overlapping event windows for single securities. Thus. we observe increases relative to CAARs(0. for most countries the main price adjustments occur within one trading week.49%). In general. the abnormal returns for large transactions and all transactions are similar but larger in magnitude for large transactions.K.82% and -1. (2006). Cross-Country Analysis Results Table V presents the results for each single country from our dataset for all (Panel A) and large transactions (Panel B). Similar to Fidrmuc et al. Ireland.described above could we find remarkable differences to our initial results. For large sell transactions we observe significantly negative results for CAARs(0.41% and -0. A. (6. 23 15 . Furthermore. and Ireland.88%) and Sweden (-0. For CAARs(0. at a lower rate. For large purchases reported in Panel B of Table V. The lowest significantly positive CAAR(0. which are presented in the following section. As expected.27%) and Germany (1. we found higher CAARs than for small transactions. and the U. After the fifth trading day the CAARs continue to rise.1) in each country except for Ireland. However.4) only in the U. Especially for Germany.03%) and the U. For large transactions. we concentrate our basic univariate event study analysis on large transactions. (-0.23 IV.K. we found significantly positive results for CAARs(0.1) are significantly lower than for the U.39%). The results are omitted from the paper but are available upon request. the results for Ireland have to be regarded with caution since the observation number for large purchases (sales) is as small as 35 (21). The above results indicate clear market reactions following the announcements of insider trades.

Another notable observation in Table V are the results for the pre-event CAARs(-20. B. However. previous literature also suggests that medium-sized trades are more informative than large trades since insiders tend to make smaller transactions. Piotroski and Roulstone (2005)). Barclay and Warner (1993) refer to this trading 24 16 .26 Moreover.24 Especially for the U. 25 Fidrmuc et al. (2002). These results demonstrate that insiders tend to make purchase (sell) transactions after the share price has declined (increased). the significance of trade size seems to be essential.4). and merger related transactions as a reason for our high CAARs. 26 Barclay and Warner (1993) also show that in an anonymous market informed insiders tend to hide behind medium-sized trades rather than trading large block transactions. We explain these differences with our more recent dataset and the increasing popularity of investing based on directors’ dealings reports. which are generally negative (positive) prior to purchase (sell) announcements for all countries except for Austria. We found the weakest evidence of announcement effects in countries with French legal origin. and Ireland are strikingly high because investing based on directors’ dealings reports is more popular in these countries than in Continental Europe and thus leads to herd-like market reactions after announcements. who report 3.1) and 4. between 1991 and 1998. we see the exclusion of all types of remuneration. Our univariate result also indicates that large transactions are followed by larger announcement effects.28% for CAARs(0. since the difference between large transaction and all transaction CAARs is 4.K. However. Lakonishok and Lee (2001). trades which are very large might lead to a We further investigate the connection between announcement effects and transaction size in the following section.12% for CAAR(0. reported in Panel B of Table V are higher compared to Fidrmuc et al. which might be due to the relatively small Austrian capital market. Ireland.K.the announcement effects. Austria. and the Netherlands. Furthermore. simply not to attract the attention of other market participants. private.25 In addition. (2006) examined directors’ dealings for the U.K.73% for CAARs(0. our univariate results confirm the general opinion from previous research that insiders follow a contrarian investment style (Seyhun (1992). does not show any announcement effects.-1).K. Transaction Size Hypothesis 2 states that large insider transactions trigger stronger announcement effects than smaller transactions.1) and 4. Friedrich et al. our results for the U. Thus.4). (2006). We assume that the results for the U.62% for CAAR(0. which is a German legal origin country.

000. Thus. Since we only observe transactions which are not anonymous.000 euros ≤ transaction size < 1.K.. the "stealth trading" hypothesis cannot be fully connected to our study.000 euros. Table VI reports the results for all transactions from our final data sample. only in the U.000 euros ≤ transaction size. does insider class A (top-level executives) practice as "stealth trading". For purchase transactions. (iii) 100. 27 See also Giamouridis et al. For reasons of brevity we do not present these results. we find the highest CAARs whenever the trade size surmounts 0. Insider Hierarchy Hypothesis 3 postulates that high-level executives have an information advantage over lowlevel executives. 17 .27 For the U. Second. for each country we calculate CAARs for the following net transaction size groups: (i) transaction size < 25. 28 All results are available upon request. C. (2009).000 euros.1% of the firm’s market capitalization. (iv) 250. we compute CAARs for all three insider classes (A to C) and compare the results. (2008).1) and CAARs(0. Nevertheless. Specifically.000 euros ≤ transaction size < 100. In none of the observed countries do we find a clear indication that medium-sized trades generate higher abnormal returns than large ones. Specifically. we assume that insider transactions by high-level executives should result in stronger announcement effects than those of low-level executives. we assume that even in a not anonymous market insiders might hide (at least to some extend) behind several medium-size trades rather than executing one large block transaction.000. we conclude that (short-term) CAARs rise with the size of the transaction.1) as the dependent variable and insider classes as dummy variables. First.4) for different transaction sizes and examine whether medium-sized transactions generate the highest returns.substantial decrease in a company's free float and therefore be of minimal interest to other market participants. Friedrich et al.000 euros. Therefore. (2006).28 Generally.000 euros ≤ transaction size < 250. Similar to Fidrmuc et al. we perform a multivariate OLS regression with CAAR(0. we also calculate CAARs(0. We use two approaches to test this hypothesis. (2002) show that medium-sized trades predict higher returns than large ones. For further discussion on the "stealth trading" hypothesis see also Blau et al.1% of the firm’s market capitalization. in our further study we calculate and mainly discuss results for all transactions as well as transactions that are at least 0. (2009) and Lebedeva et al.K. We also perform a multivariate regression to test for differences between the size groups. and (v) 1. (ii) 25.000 euros.

For Sweden and Italy. A negative coefficient for Insider class B or Insider class C indicates the opposite and consequently supports the hierarchy hypothesis. In France we do find a clear hierarchal pattern for CAAR(0. where Insider class A is the reference category. We discuss the relation between firm size and announcement effects separately in the section below. divided by shares outstanding on the day of the announcement.seem to trigger the highest (significant) CAARs. however the CAARs show a hierarchical pattern what let us assume that insider class A is indeed best informed in the U. The differences between insider classes are relatively small.29 According to Lakonishok and Lee (2001). Hence. we find only incoherent results from our univariate insider hierarchy test. We further include the variable Book to market. We further test the hierarchy hypothesis by performing a multivariate regression (Table VII). a positive coefficient for Insider class B or Insider class C indicates that the announcement effect of Insider class A is smaller in magnitude and therefore contradicts the hierarchy hypothesis. Moreover. which is the number of shares traded. Thus. we find the highest CAARs(0. Altogether. which is the book to market value at the beginning of the year when the transaction took place. we also test hypothesis 4. insiders tend to purchase stocks that are cheap according to the book to market value. The OLS regression models include a dummy variable for each insider class. From the univariate results. we construct Transaction size.1) for insider class C. and zero otherwise. In Ireland.4). which postulates that multiple trades by directors on the same day will give a stronger signal to the market. We also believe 29 A high book to market value (above 1) indicates that a stock is undervalued. In Germany we find about the same results across all insider classes. we include the dummy variable Multiple trade. none of the results are statistically significant. which is the natural logarithm of the number of shares outstanding multiplied by the closing price of the underlying share on the trading day. In particular. To control for firm size we construct the variable Firm size.K. 18 . it is apparent that (relative) transaction size is crucial for the size of the announcement effect. the announcement effect is largest for insider class B. which equals one if more than one insider trades in a firm on a given day. however. In conjunction with the hierarchy hypothesis. we include other control variables in our regression model.

32 See Betzer and Theissen (2010) for a detailed analysis of reporting delays in the German market. We expect a smaller announcement effect in firms with frequent insider trading compared to firms with less insider trading. Therefore.that announcement effects will be larger in undervalued than overvalued stocks. we expect a positive relationship between book to market ratios and CAARs. 31 The average trade frequency per firm and country is calculated by dividing the number of all trades 12 months prior to the transaction by the number of firms. for instance. which measures the number of days between trading and announcement days. Furthermore. we construct the dummy variable Frequent trading. Due to information leakage we expect directors’ dealings reports with large differences between transaction and announcement days to have smaller announcement effects. trade on a monthly basis we expect the information content of these trades to be lower than for one single trade in a year. we expect a negative relationship between Momentum and post-event CAARs. we include the variable Momentum. and zero otherwise. The rationale behind this is that if insiders.32 Given that Momentum controls for the market timing ability of insiders. We also include the variable Day gap. For each country the dummy variable starts one year after the beginning of the observation period for the respective country. we expect a negative relation between Day gap and CAARs. We construct Momentum by calculating the market-adjusted CAARs for 100 days prior to the insider transaction. Thus. which reported at least one director’s dealings within 12 months prior to a transaction. it is important to note that it is calculated relative to the trading and not the announcement day. which control for previous purchases or sales before the respective announcement. Previous buy is set to one if at least one (large) purchase has been announced 20 days before the respective (large transaction) announcement.30 We also examine whether the frequency of trading in a specific firm has an influence on the announcement effect. we construct two dummy variables Previous buy and Previous sell. Previous sell is set to one if at least one (large) sale has been announced 20 days before the respective (large transaction) announcement. which measures the performance of shares 100 trading days prior to the transaction day. Since company insiders seem to have a contrarian investment style.31 In addition. 30 19 . and zero otherwise. which is set to one if the average trade frequency in a firm 12 months prior to a transaction is higher than the average trade frequency of all firms in 12 months prior to the transaction in the respective country. and zero otherwise. Thus.

However. Only for Germany we find a significantly positive coefficient for Insider class C. All regression models include year dummies as well as industry sector dummies. and zero otherwise. Correspondent to previous studies we conclude that insider hierarchy has only a minimal influence on the announcement effect for the countries in our sample. both are positive. we For Austria and France we use the starting dates of the public announcements of directors’ dealings by the regulatory authorities.K. we expect positive signs for the Insider class coefficients. Panel A of Table VII shows the regression results for purchase transactions. Other noteworthy results are the significantly positive coefficients for Ireland in Panel A. which is set to one if the transaction has been performed after the implementation of the Market Abuse Directive 2003/6/EC. we find a similar picture because the Insider class B coefficient is negative at the 10% significance level. we find a slight indication for insider hierarchy in France since the coefficient for Insider class C is negative at the 10% level. which we further analyze in a separate section below. 33 20 . company secretaries or group directors trade on more valuable information than CEOs. had exceptionally well-developed legal frameworks for directors' dealings before the implementation of the Market Abuse Directive. Panel B of Table VII shows regression results for sell transactions. In contrast to the univariate results. which indicates that top-level executives trigger the lowest announcement effects. Similar to the findings from Fidrmuc et al. which are reported in Table I.K. we omit Legal change for these countries to avoid unnecessary noise. none of the coefficients are significant. For Sweden. we include the dummy variable Legal change. Considering that our study is based on eight countries we do not see enough support to verify the information hierarchy hypothesis. Both observations indicate that trades by top-level executives trigger stronger market reactions than those of low-level executives in France and mid-level executives in Sweden. Only for France and Sweden do we find tentative evidence for the insider hierarchy hypothesis. (2006). thus we cannot confirm our univariate results that top-level executives trigger the highest CAARs. which suggest that lower-class executives such as divisional/regional CEOs. For the U. contradicting the hierarchy hypothesis. Only for Ireland do we find statistically significant results for both Insider class coefficients. For the hierarchy hypothesis to hold.Finally.33 Since Ireland and the U.

These results clearly show that firm size is an important determinant for announcement effects after purchases in these countries. Corresponding results for sell transactions are provided in Panel B. which. Considering that all of these countries show announcement effects (see Table V) and have relatively large and developed capital markets it is somehow surprising that other countries with large capital markets such as France or Italy do not show Fidrmuc et al. A possible explanation for this reverse relation is that in some companies the executives are required to hold certain percentages of their annual cash bonuses in stocks. Similar to Fidrmuc et al. (2006). 34 21 . Firm Size Hypothesis 5 postulates that firm size has a reverse influence on the announcement effect. such transactions are remuneration-related and only have a low informative content for outsiders. Panel A of Table VII shows significantly negative coefficients at the 1% level for Firm size for Germany. after performing the multivariate regression on the large transactions sample.K. Sweden.34 D. 35 An example of a company which requires executives to invest certain percentages of their annual cash bonuses in the company's stocks is BT Group Plc (cf.35 If these performance related annual cash bonus increases or decreases simultaneously for all executives this can result in multiple transactions by several insiders on the same day. however. This suggests that announcements by various directors on the same day lead to higher market reactions. and the U. (2006) find that large purchase transactions by CEOs trigger smaller announcement effects than large transactions by other executives. Multiple Trades The multivariate OLS regression reported in Table VII also presents a test of Hypothesis 4.explain these results through high-level executives being more closely observed by regulatory authorities and therefore reluctant to trade at informative moments. Only for Ireland we find a significant coefficient. is positive. Italy. Panel A reports positive and significant coefficients for the Multiple trade dummies in Ireland. E. This reverse relation contradicts the assumption that multiple trades by different insiders on the same day increase the announcement effect. however. Obviously. Generally.K.K. Sweden. we also find significantly positive Insider class B coefficients for the U. and the U. BT Group’s annual report of 2009). we conclude that multiple trades by several directors on the same day lead to higher announcement effects.

F. which however greatly depends on the country. 22 . Specifically. For Austria. Legal Change Panel A of Table VII reports significantly positive Legal change coefficients for Sweden and the Netherlands. 36 See also Bajo et al. Sweden or Germany is also sneaking and thus no noticeable changes in announcement effects are visible in the short-run. however. This indicates that improved reporting standards had a positive impact on the announcement effect in both countries. which is almost at the beginning of our entire observation period. In Italy the transition process to an improved legal system. we conclude that firm size is an important determinant for the announcement effect. For Germany we explain this with the early implementation of the Market Abuse Directive in October 2004. This leads to the conclusion that an increase in information on specific transactions and better reporting will enhance investing based on directors' dealings and thus lead to stronger announcement effects. directors' dealings reports became more detailed with regard to the insider name. After the implementation of the Market Abuse Directive the contents of directors' dealings reports improved noticeably in both countries.any (statistically significant) firm size effects. (2006).. for instance. position and transaction type. Since Austria generally does not show any announcement effects this is not surprising. Italy. none of the French law countries showed firm size effects. Panel B reports significantly negative results for Legal change in France. It had relative good reporting standards already before the implementation of the Market Abuse Directive. This is because court cases for instance can take up to several years. on the other hand is a unique case. Germany and Italy we do not obtain any significant coefficients for Legal change.K.36 The transition process to an efficient prosecution takes a lot longer than implementation of better reporting standards in already well-functioning legal systems. For purchase transactions. which also indicates a stronger announcement effect. similar to the well-functioning systems in the U. Thus. regulations were largely ignored and violations not prosecuted. we expected a more uniform relation between firm size and announcement effects. Overall.

whereby it is noteworthy that Austria has a relatively small capital market and exploiting insider trade announcements might be a rather uncommon practice. However. Italy. for instance. compare short-term market reactions between countries of French and German legal origin. which is the only Scandinavian law country in our dataset.K. For German law countries (Germany and Austria) we obtain ambivalent results. According to the Market Abuse and Transparency Directive 37 La Porta et al. Fidrmuc et al. By grouping countries according to the legal origin. Explaining Cross-Country Differences Considering our overall results. Moreover. (1998). He concludes that English (common) law countries generally have the strongest investor protection. As corporate governance measures Fidrmuc et al. French law countries (France. English law countries (U. (2010) use (among others) the legal origin described above and the legal protection of minority shareholders against self-dealing by corporate insiders. Both countries are common law countries. Our results are in line with the explanation provided by Fidrmuc et al. for sales they find weaker reactions in countries with good corporate governance. and the Netherlands) collectively show the smallest reactions to insider trades. (2010) suggest that several country-specific corporate governance measures explain the differences in market reactions to directors’ dealings. In addition to the legal origin.G. Our findings also indicate that the legal origin partially explains cross-country differences. There are several possible explanations as to why some countries show substantial announcement effects and others do not. shows moderate results. On the other hand. and Ireland) show the strongest market reactions. the authors implicitly assume that the legal origin must be relevant in explaining announcement effects after insider trading. and French law countries the worst investor protection. (1998) categorizes countries based on the legal protections of shareholders (investors). which are known to have stronger corporate governance regulations than civil law countries.K. as categorized by La Porta et al. Previous studies suggest that the legal origin. Germany and Scandinavian law countries moderate investor protection. plays an important role in explaining cross-country differences for insider trading profitability. They find stronger market reactions to purchases in countries with good corporate governance. we assume that technical issues such as the accessibility of directors’ dealings reports by the public play a crucial role in explaining cross-country differences.37 Aussenegg and Ranzi (2008). (2010) because we report substantially higher abnormal returns for Ireland and the U. Sweden. 23 . we conclude that announcement effects exist but vary greatly in size across countries.

We observe similar delays for transactions announced on Directive 2004/109/EC. Germany and Sweden. We find substantial reporting delays in these countries even for transactions performed after the implementation of the Market Abuse Directive. one day for Ireland and the U. For the period after the implementation of the Transparency Directive (see Table I) we see an increase in reporting speed in almost each country. for Austria. 38 24 . The lower reporting standards in these countries become more evident when one considers that most companies in Europe report directors’ dealings not only on an officially appointed central storage internet page (as required by the Transparency Directive) but also on the company’s website. eight days for Austria. seven days for the Netherlands.K. four days for Italy and the Netherlands.K. France and the Netherlands the reporting standards are lower and directors’ dealings reports are substantially harder to obtain in a timely manner. all transactions are reported in a timely manner on the LSE internet page: http://www. certainty as to the information source. the investor relations in these countries are often well informed in the case of queries regarding directors’ dealings reports.londonstockexchange. and http://www. (Article 21 & 22) 39 In the U. These mechanisms should comply with minimum quality standards of security. however. four days for Italy. The U. Ireland and Germany for instance have well-organized and efficient reporting systems.38 However. the reporting delays are still relatively high for some countries. Directors’ dealings reports are accessible for the public in a timely manner through the London Stock Exchange internet page in the U. both directives have been implemented by each European member state in a different fashion. requires the Member State to ensure that there is at least one officially appointed mechanism for the central storage of regulated information.39 Moreover. nine days for France.K. In contrast. time recording. the mean reporting delay is ten (calendar) days for Austria.K. Specifically.euroadhoc.html. which displays directors’ dealings with delays of at least one day after they have been reported on a company’s website. the officially appointed central storage internet page is the “Autorité des marchés financier” internet page. which is reflected in the quality of directors’ dealings reporting.. In France. Specifically. nine (calendar) days for France. After the implementation of the Transparency Directive in Germany about 90% percent of all transactions are reported on the http://www. or adhoc news portals in Germany such as the DGAP internet page.de. and easy access by end users.com/exchange/prices-and-news/news/market-news/market-news-home.de.companies announcing directors’ dealings have to fulfill certain quality standards regarding the timely accessibility of the reports by the public.dgap.

the U.. On the other hand. Industry Sector Analysis Hauser and Vermeersch (2002) point out the increasing importance of sector diversification for stock selection. Qiagen N. which reports in Austria. To achieve sufficient sample sizes. However.org/. as well as “Energy” and “Utilities” to “Energy”. show the largest announcement effects in the healthcare. H. the Netherlands: http://www. France: http://www. it might take up to four days until this transaction is reported in the Netherlands.41 A substantially delayed reporting in the central source of information for directors’ dealings makes the exploitation of insider trades by outsiders difficult since they must monitor several news portals and company’s website simultaneously or pay costly data vendors to get the most current data on directors’ dealings. while the same transaction is reported on the trading day in Germany. in Germany directors’ dealings are reported almost simultaneously on the publicly available DGAP internet page and a company’s website.afm. which reports in the Netherlands and Germany. We therefore switch our focus to sectors and assess Hypothesis 6.V. Thus.aspx. The results for CAAR(0. and Switzerland.E. we perform a multivariate regression with sectors as dummy variables in a similar fashion as we have done above. and materials sectors show the Austria: http://www..amf-france. which report the same transactions in different countries.nl/en.40 For some transactions we observed delays of as many as ten trading days after they have been reported on a company’s webpage. conwert Immobilien Invest S.html. due to limited data availability we identify R&D-intensive firms based on the industry sector. which reports in France. 41 Examples of companies which are subject to the above described reporting delays are Adecco S.at/cms/site/EN/index. financials. For instance. 40 25 . plays a crucial role in explaining cross-country differences.the Austrian as well as the Dutch central storage internet pages. Second. energy and IT sectors.gv. we merge “Information Technology” and “Telecom” to “IT”. To test whether announcement effects are larger in certain sectors we first group all CAARs into eight sectors across all countries and compare the results.K.1). The difference in reporting quality can be also observed in cross-listed companies. Table VIII presents the univariate results for each sector.A.fma. 42 We are aware that measures such as R&D expenses to sales would better describe the R&D intensity of firms. our results indicate that timely and publicly available reporting as proposed by the Market Abuse and Transparency Directive..42 Sector categorization is provided by Compustat. Since we believe that healthcare is the most R&D-intensive sector we use this sector as the base category. whereas the consumer.

oil. For purchase transactions. Second. similarly structured data samples. First. we conclude that the exploitation of directors’ dealings announcements seem to be most worthwhile in the energy. is low compared to the other remaining sector dummies which are significant at the 1% level. We test each country for several determinants that are known from previous literature to influence announcement effects. which is reflected in the large announcement effects. which suggests that announcement effects are indeed higher in the healthcare sector. due to the worldwide increase in demand for products. and apply analogous testing methods for each country. 43 See also Brevik and Kind (2004) who investigate the main determinates for the price formation of oil. however. remunerations. in particular. we examine whether announcements of directors’ dealing reports are informative for outside investors in a broad selection of European countries. from the energy sector during our observation period. sensitive to purchase or sales signals from insiders in this sector.43 Thus the market is. healthcare and to some extent in the IT sectors. we believe that the predictability of (long-term) price changes is relatively simple for anybody who might have even a small information advantage. for Energy the coefficient is not statistically different from zero what confirms our univariate results. specifically oil.smallest announcement effects. Altogether. For IT the coefficient is statically different from zero at the 5% significance level. we find that all sector dummies have a negative coefficient. 26 . The data is adjusted for transactions that follow or precede mergers. gas) and their strong correlation to the overall performance of the energy sector. capital increases. For the energy sector we see two reasons for the high abnormal returns. To confirm our univariate results we perform the same multivariate regression as above but on the entire European data sample by including country dummy variables. Conclusion In this paper. and other effects that might distort the examination of the announcement effect.g. The results are presented in Table IX. These observations are in line with our assumption that announcement effects are largest in R&D-intensive sectors. We use similar observation periods. the stocks in this sector have generally performed exceptionally well. because of the simple structure of these products (e. However. which. V.

This is due to the higher signaling effect of large trades compared to small trades. These results are in line with previous studies but nevertheless surprising since top-level executives are expected to be best informed about the value of their company’s assets. The announcement effects are largest for the U. we do not regard our results as fully detached from market efficiency.U. reactions in the markets are stronger after large trade announcements than after small trade announcements. Nevertheless. which is to earn returns on an investment. Sweden. Furthermore. however. This is because insiders have many motives for selling their company’s stocks. Sweden. The recently implemented E. This. Our results imply that under certain conditions outside investors can profit noticeably from insider trade announcements. A possible explanation is that top insiders are closely watched by regulatory authorities and news media and do not want to attract attention by earning large profits with their company’s stocks. Commission to harmonize European Capital markets we still found significant differences in reporting standards. quality and consequently short-term announcement 27 .K.K. since smallcap stocks are less liquid and have higher bid-ask spreads. due to the magnitude of our results we are still confident that correctly filtered directors’ dealings give valuable information for stock selection and analysis. Finally. where lowlevel executives trigger stronger announcement effects than top-level executives. our paper reveals that directors’ dealings are informative in European stock markets. such as for liquidity reasons or portfolio diversification. the abnormal returns are substantially larger when the insider transactions are made in small firms. However.We find substantial announcement effects for purchases in Germany.K.U. directives 2003/6/EC and 2004/109/EC. In most countries top-level executives do not trigger the strongest announcement effects. Overall. and the U. Our results confirm findings from previous literature that sales have lower information content than purchases.. For countries with the strongest announcement returns such as Germany. and the U. we find that directors’ dealings announcements lead to highest abnormal returns in the R&D-intensive sector healthcare as well as the energy sector. Despite these efforts by the E. and Ireland. This is especially evident for Ireland. set the path for faster and better reporting of directors' dealings across all European member states. whereas they have only one motive for purchasing stocks. Only for France and Sweden do we find tentative evidence of an insider hierarchy. shows that the profitability of insider transactions cannot be taken for granted. Ireland.

After all. however.effects in most countries from our data sample. up to each single member state to translate these directives carefully into its law and accurately prosecute any violations. at least with respect to directors' dealings disclosures. It is. Our results strongly indicate that these efforts should be taken upon by each member state. the reward could be a more competitive and efficient European financial market. we found that countries which have accurately translated the directives into their regulatory framework show stronger short-term announcement effects than countries. Generally. 28 .U. Commission indeed lead to more informative directors' dealings reports combined with faster price adjustments and thus to more efficient markets. which rather neglect strict implementation of the directives. This gives strong reason to believe that the directives imposed by the E.

84. Lo. pp. Degryse. pp. A. Vol.V.. and Perote. Studies in Economics and Finance. J. Aussenegg. A. 1993. SSRN Working Paper. R.. B. The econometrics of financial markets (Princeton NJ: Princeton University Press. 1989. Corrado. 1997. R. Acharya.. F. ‘Insider Trading and Corporate Governance – The Case of Germany’. 2009. pp. C.. and Warner. Y. 32. F. 57-66. pp. 23. Journal of Financial Economics. 2007. and Van Ness. T.. 130-147. Journal of Business Finance & Accounting. Van Ness. C. Alexander. pp. 385-395. and insider gains’. and MacKinlay. Vol. R.. 2008. 2006. 23. D.. 110-141. J. ’Detecting long-run abnormal stock returns: The empirical power and specification of test statistics’.C. ’Insider trading in credit derivatives’. and Lyon J. and Theissen. J. and Lefebvre. and Vickrey. ’Sooner or later: An analysis of the delays in insider trading reporting’. Vol. E. C. ’Mimickers of corporate insiders who make largevolume trades’. C. 2009. W. and Petracci. pp. Vol. ’A nonparametric test for abnormal security price performance in event studies’. No. ’Stealth trading and volatility (which trades move prices?) ’. SSRN Working Paper. R&D. ’What is going on in the oil market?’. 2007). pp. 53.. A. H. Barber. J.. pp. Quarterly Review of Economics & Finance. E. Miguel. 73-94. 1430283. ’Intraday stealth trading: Which trades move prices during periods of high volume?’.. and Ranzi.... ’An empirical analysis of legal insider trading in the Netherlands’.. Vol. Journal of Financial Economics. 1265772. Vickrey. D. W. 2010. Barclay. No. Bajo.. E. Campbell. Insider dealing and money laundering in the EU: law and regulation (Aldershot England: Ashgate. Vol. De Jong. 2004. 2009. B. A. and Kind A. pp. 281-305. 2002. 94-118. European Financial Management. 34.. A. B.. 1997)... ‘Do what insiders do: Abnormal performances after the release of insiders’. A. Vol. 442-457. Journal of Finance. ’An investigation of insider trading profits in the Spanish stock market’. 15. M. Journal of Financial Research. V. 42. M. and Theissen... Vol.References Aboody. Blau. Bettis. Vol.. 37. E. 1-21. D. 2000. Betzer. 1997. Financial Markets and Portfolio Management. B. Brevik.. 402–29. Betzer. B. 18. pp. D. Vol. Vol. ’Corporate insider trading and the short-run price impact of private information in Continental Europe’. 55. H. B. Vol. 43. Journal of Financial Economics. Financial Analysts Journal. Johnson. F. Del Brio. Journal of Financial Economics. 2747-2766. 341-372. Lev. J. 29 . ’Information asymmetry. M. pp. pp.

and Vermeersch. 1998. SSRN Working Paper. BuR Business Research Journal.. D. ’Why are Abnormal Returns After Insider Transactions Larger in Better Investor Protection Countries?’. Journal of Finance. H. SSRN Working Paper.. Eckbo. 48. ’Event studies in economics and finance’. and Nedwed. and Smith. Goergen. J. 7-30. Vol. pp. Kallunki. and Moniz.. Lebedeva. E. and Howe J. 5. 677442. pp. La Porta. ’The ultimate ownership of Western European corporations’. Vol. 53. H.. A. Gregory. M. Journal of Finance. 1991.. Journal of Finance. A. J. SSRN Working Paper. C. ’Law and finance’. Lopez-de-Silanes. pp. 453471. Vol. Journal of Financial Economics. Vol.. 35. L. P. ’The conditional performance of insider trades’. pp. Vol. Journal of Political Economy. European Financial Management. 1160305. 13-39. Korczak. 2001. 1990... S. 2002. The Review of Economics and Statistics. pp. Vol. news releases and ownership concentration’. 106. Journal of Economic Literature. 2003. Lakonishok. ’Insiderregulierungen und Finanzmärkte’. pp. 30 . and Renneboog. and Lee I.. Nilsson. and Korczak. 365-395. R.Dymke. 2008. pp. Vol. and Stehle. 1344042. Giamouridis.. F.. M. 8. 79-111. Liodakis. I. Shleifer. No. T. H. Fidrmuc. pp. 1. 37-53. S... J. pp. M. 2008. O. U. SSRN Working Paper. pp.. Review of Financial Studies. No. Vol. 14. 65. 85.. 1509607. 16. A. 2931-2973. ’Are insider’s trades informative?’. pp... J. No. Vol.. 2002. R. Lin. 1997. H. Gersbach. ’Insider trading in the OTC market’. L. 234-253.. 2002. Vol. Financial Markets and Portfolio Management. 2009. 2006.. 61. ’Estimating the returns to insider trading: A performance-evaluation perspective’. A. A.do corporate insiders exploit inside information?’. Financial Markets and Portfolio Management. C. R. and Tonks. 2010. No. Journal of Accounting and Economics. Friederich. Faccio. E.. D. 45. Maug. P. MacKinlay. 2005. Vol.. M. Vol. pp. D. Jeng. J. ’Insider trading. and Walter A. and Vishny. ’Abnormal Returns in the Vicinity of Insider Transactions: Unbiased Estimates for Germany’. ’Some Insiders are Indeed Smart Investors’. 2009. Seifert. Vol. 1273-1284. and Hellström J. Fidrmuc. and Zeckhauser. ’Short-run returns around the trades of corporate insiders on the London Stock Exchange’. ’Why do insiders trade? Evidence based on unique data on Swedish insiders’. J. 188-205. Matatko. ’Stealth trading by corporate insiders’.’ Is country diversification still better than sector diversification?’. Hauser.. and Lang. L. ‘Insider trading in Germany . 467-498. P... P. Klinge. R. Metrick. B. pp. A.... 53-61. 1113-1155. 1998. and Schneider. M.

H. 107. 7. R. ’Germany’s new insider law: The empirical evidence after the first year’. D. Vol. D. 55-81. M.. ’Why does aggregate insider trading predict future stock returns?’.. 25-44. A. S. 2010 available at: http://www. Lang. pp. 39. Seyhun. 1992. Journal of Business. 1988.co. C. ’Insider Trading in the Swiss Stock Market’. 449–462. Vol. 17. Vol. 189-212. Vol. pp. 16. pp. Vol. H. A.mazars. 31 . pp.. 1986. 1303-1331. Pope. Journal of Business Finance & Accounting. 61. ’Insider trading: some evidence on market efficiency and director's share dealings in Great Britain’. Stotz. A. and market efficiency’.. pp.uk/Home/News/Our-publications/General-publications/Transparency-DirectiveAssessment-Report Piotroski. Journal of Accounting and Economics. Quarterly Journal of Economics... J. and Wyttenbach. Rozeff. Morris. 2006. T. German Economic Review. 331-362. ’ Transparency Directive Assessment Report’. costs of trading. pp.Mazars. N. ’Insider profits. pp.. D. P. 2007. and Zaman. M. O. 2005. Swiss Journal of Economics and Statistics.. F. Seyhun. Zingg. Vol. and Peel D. 359-380. 143.. 1990. and Roulstone. ’Do insider trades reflect both contrarian beliefs and superior knowledge about future cash flow realizations?’. S. N. Vol. Journal of Financial Economics. ’Market efficiency and insider trading: new evidence’.

Sweden (Scandinavian) the new regulatory framework further restricted dd's by imposing a one-month trading gap prior to final and interim earnings announcements. dd's reporting standards improved by providing more details on the insider position and transaction type in dd's reports. Therefore. For instance.K. After the implementation of the MAD the reporting of dd's improved significantly. Before the implementation of the MAD. Before the implementation of the MAD. Thus. dd's had to be reported to the regulator within five (CONSOB) business days. (English) The U.Table I European Regulations on Directors’ Dealings This table gives an overview on the implementation dates of the Market Abuse Directive 2003/6/EC (MAD) and the Transparency Directive 2004/109/EC (TD) in each country.de or www. 4 BörseG/ § 82 Abs. similar to the U. After the implementation of the MAD. which resulted in substantial reporting delays (see also Betzer and Theissen (2010)). However. most regulations were largely ignored and violations remained without sanctions (see also Bajo et al. the regulatory authority started to publicly announce dd's on its website. Ireland's legal framework is primarily governed by the Companies Law which is adopted from the U. both directives led to unnoticeable changes in dd's disclosure requirements.. dd's reporting standards further improved by providing more details on the insider position and transaction type in dd's reports. some companies still reported dd's only on their web pages or in the newspaper. U. After the implementation of the MAD. However. Ireland had an effective regulatory framework for dd's prior to the implementation of the MAD and the TD. 8 BörseG Article 621-18-2 Code monétaire et financier/ Article 223-22 . Legal origin. Italy had a well established regulatory framework before May-05 Dec-08 first part/ Commissione Nazionale per Aug-09 final le Società e la Borsa the implementation of the MAD and TD. dd's had to be reported "without delay". the regulatory authority started to publicly announce dd's on its website. In May-05.Part IV Italy (French) Compared to other Continental European countries. www.dgap. which included a maximum reporting period of five business days and a two-month trading gap prior to final and interim earnings announcements. as categorized by La Porta et al. Jul-05 Market Abuse Penal Act (2005:377)/ Swedish Companies Act (2005:551) Company Securities Act 1985/ Financial Services and Markets Act 2000 Jul-05 Jan-07 Financial Services Authority (FSA) 32 .euroadhoc. After the implementation of the TD companies are required to report via ad-hoc newsportals such as www. K. The regulatory authority. however. (1998). there was no public disclosure of dd's. however.hugingroup. Country (legal origin) Austria (German) France (French) Date of major legal change within observation period.com. Jan-05 Jul-05 Apr-07 Sep-06 first part/ Autorité des marchés Dec-07 final financiers (AMF) Germany (German) Before the implementation of the MAD. Oct-04 Jan-07 Bundesanstalt für § 15a WpHG Finanzdienstleistungsaufsicht (BaFin) Ireland (English) Oct-05 Jun-07 Irish Financial Services Regulatory Authority (Financial Regulator) Companies Act (1990) . Oct-05 Jan-07 first part/ Autoriteit Financiële Jan-09 final Markten (AFM) Jul-07 Finansinspektionen (FI) Article 114 and article 193 Testo Unico della Finanza e gli / Article 152-sexies e seguenti del Regolamento Emittenti Consob Wte 1995 – Art. 47a Netherlands (French) Sweden had an effective regulatory framework for dd's prior to the implementation of the MAD.223-26 du règlement général de l’AMF Before the implementation of the MAD. (2005)).de.K. MAD TD Regulatory authority Finanzmarktaufsicht (FMA) Acts/Laws regulating Directors' Dealings § 48 d Abs. dd's had to be reported before the 10th day of the month subsequent to the transaction. K. had an effective regulatory framework for dd's prior to the implementation of the MAD/ TD. there was no public disclosure of dd's. In Mar-06. did not explicitly define what "without delay" means.

731 2007 225 73 630 770 1039 421 98 18 1400 510 170 184 1569 667 2309 664 10. which represents 29.215 2009 119 40 599 350 632 246 32 18 838 258 67 62 977 400 1458 383 6.907. Country Purchases Sales Purchases Sales Purchases Sales Purchases Sales Purchases Sales Purchases Sales Purchases Sales Purchases Sales Total 2003 6 4 0 0 221 235 0 1 64 44 23 49 0 0 365 127 1.Table II Summary Statistics for Final Data Sample This table shows the final data sample for all (net) insider purchases.139 2004 3 6 2 4 224 383 0 1 63 84 26 67 832 579 363 115 2.K.752 2005 36 49 101 335 450 651 27 10 248 218 30 70 982 734 621 282 4.844 2006 40 29 317 527 721 590 53 12 734 733 69 100 1279 814 1109 604 7. 33 .52% of the original data sample.479 Austria France Germany Ireland Italy Netherlands Sweden U.747 2008 284 37 989 267 1904 165 127 12 2020 254 195 39 1543 411 2645 323 11. The final observation number is 44. sales between 01/2003 and 12/2009.

78 1.54 1. option related sales and exercises between 01/2003 and 12/2009.39% 76 0.51 0.83 0.53 0.23 2.08% 130 0.60 1.61% 284 6. of trades per firm/year % Market capitalization Number of firms Ireland No.75% 103 2.43% 28 2.08% 75 3.42 0. of trades per firm/year % Market capitalization Number of firms UK No.38 0.26% 122 0.47 0.26% 40 5.33 1.72% 384 1.23% 14 0.28% 136 0.05% 16 0.09 1.73% 366 1.28 0.58 0.10% 70 0.57 0.36% 398 2.67% 573 3.32 0.Table III Summary Statistics for European Insider Trades This table shows all (net) insider purchases.14% 2 0.12% 82 1.27 0.09 0. of trades per firm/year % Market capitalization Number of firms Germany No.18 0.37% 736 All Austria No.41 0.38% 439 1.11% 471 0. of trades per firm/year % Market capitalization Number of firms Sweden No.52 0.16 0.15% 307 1.11% 6 0.26 1.07 1.90 0.64% 54 2. % Market capitalization is the average percentage of the firm’s capitalization which is traded by insiders per firm and year.10% 79 0.45% 110 4.56% 252 1.53 0. of trades per firm/year % Market capitalization Number of firms 3.67% 499 2.46 0.88 1.11% 21 0. of trades per firm/year % Market capitalization Number of firms Italy No.04 0.90% 507 3.06 1.93 0.46% 31 2.69% 328 4. of trades per firm/year % Market capitalization Number of firms France No. of trades per firm/year is the average number of insider trades per firm and year.52 0.15% 306 0.14 0.12% 481 34 .34 1.59% 43 Purchases Sales Exercises 5.27 0. Option related Sales Sales & Option related Sales 1.01 2.39 0.66% 315 1.10 1.80% 88 2.24 0.72 0.40 0.85 0.76 0.90 0.11 0. No.54 0.44 1.04% 41 0. Market capitalization is calculated as shares outstanding multiplied with the closing price of the underlying share on the trading day.17% 232 1.24% 126 7.94 0.39% 431 0. of trades per firm/year % Market capitalization Number of firms Netherlands No. sales.25% 1213 1.48% 1316 8.44% 75 1.35% 628 0.62% 54 1.62% 70 1.19% 237 2.

199 0.47% 1. Trade value is the total volume in euros traded by all insiders across the entire sample. executive director.10% 0. Insider class A: CEO.291 4.67% N 4576 Mean 2.32% 0.61% 65.24% 0.00% Maximum 600.677 7.000 43.88% Median 166 0.28% 69. Large transactions are (net) purchases and sales that are larger than 0.15% Median 27 0.000 72.00% 0.1% of the firms’ market capitalization.02% 0.Table IV Summary Statistics for European Insider Trades by Insider Class This table shows (net) purchases and sales by insiders in Austria. CFO. non-executive vice-chairman.10% 0.12% 0. Insiders are classified into the following three classes.28% 72.510. Sweden.000 43. Italy. Panel A: All Transactions Net purchases Trade value (€'000) % Market capitalization (total) % Market capitalization by insiderclass Insider class A Insider class B Insider class C Net Sales Trade value (€'000) % Market capitalization (total) % Market capitalization by insiderclass Insider class A Insider class B Insider class C 4.01% 0.00% 0. % Market capitalization (total) is the total volume traded as a percentage of the firms’ market capitalization across all firms.10% 0.240 5.05% 43.10% 2.00% 0.598 4107 4.510.41% 0.01% Minimum 1.67% N 30878 Mean 407 0. upper management of subsidiaries. managing director.00 0. Vice President.28% 69.03% 0.10% 0.00% 0.41% 460 0.469 0. COO.12% 0.00% 0.06% 0.43% 1. Chief Information Officer.10% 0.02% 0. President. the Netherlands.61% 65.08% 0.71% 0.36% 1.43% 1.523 14029 1.59% 0.00 0. lower class executive (sales director.381 1.498 12. group director. and similar corporate positions as well as respective family members. (non-executive) director.10% 0. France. technical manager etc. Insider class B: Divisional/regional CEO.66% 23. board of auditors. divisional/regional director and similar corporate positions as well as respective family members.66% 23.55% 0.03% 1.22% 0.K. Ireland.678 10.105 1. Deputy CEO.66% 35 .22% 0.27% Minimum 1. supervisory board member. CEO of subsidiary.00% 0.00% 2.1%*Mcap) Net purchases Trade value (€'000) % Market capitalization (total) % Market capitalization by insiderclass Insider class A Insider class B Insider class C Net Sales Trade value (€'000) % Market capitalization (total) % Market capitalization by insiderclass Insider class A Insider class B Insider class C 1. Germany.).77 0.37% 0. Insider class C: Non-executive board member. Chief Scientific Officer. and similar corporate positions as well as respective family members.373 605 1. Officer. company secretary.10% Maximum 600.01% 0.42% 96 0.88% 0.09% 43. chairman (also non-executive).701 1.09% 43. and the U.22 0.28% 72. former CEO/executive/board member.66% Panel B: Large Transactions (> 0. between 01/2003 and 12/2009.301 2.44% 0.000 72.05% 43. upper management.33% 0.

35 5.12 -0.74% 11.76 -4.Table V Cumulative Abnormal Returns for Insider Trades by Country This table reports the CAARs for directors’ trades between 01/2003 and 12/2009.74% -7.91% 1.82 -0.64% -0.72 1.89% 1.70% 2.51 -6.4) CAAR (-20.21% 8.58% 4.06% -0.52% 0.63 0.38 5.4) (-20.67% 2.02% -0.32% -3.70 3.47 -0.01 0.99% -1.27% 7.12% 10. Panel A: All Transactions Country N Austria Purchases CAAR t-statistic Sales CAAR t-statistic Purchases France CAAR t-statistic Sales CAAR t-statistic Germany Purchases CAAR t-statistic Sales CAAR t-statistic Purchases Ireland CAAR t-statistic Sales CAAR t-statistic Purchases Italy CAAR t-statistic Sales CAAR t-statistic Netherl.37% -3.32 -3.63% 2. trank.498 -0.48 -3.71 0.83 8.23 -0. An estimation window of 180 trading days and an observation window of 41 days centered on the announcement day have been used.12 -4.97% -2.49 2. Purchases CAAR t-statistic Sales CAAR t-statistic Purchases Sweden CAAR t-statistic Sales CAAR t-statistic Purchases U.1% of the firms’ market capitalization.05 1.00 -2.56 1.53% -6.82 0.11% -0.04% -2.45% 1.39% 6.48 1.34% -0.18 -0.02% -0.95 CAAR (0.691 -0.76 1.84% 8.66% 1.07 1.44 21 -1.15% 4.77 -2.52 0.44% -2.50 2.23% 5.55 -1.33 -0.82% -1. J1.23 -0.81% 3.26 1.84% -8.20) 36 .74 1.45 -2.04 -4.75 3.137 -0.43% -3.64 2.82 3.48% 7.22% -4.09 -1.870 1.05% 3.32% 3.80 1.101 -0.367 0.20 2.56% 3.33% -0.77 0.05% 1.42 1.00 -2.56 72 -0.58 46 1.11 -4.02 6.63% 2.99 118 -0.48% 6.29 2.22% -2.1) CAAR (0.05% -2.15% -3.35% -2.19 -1.00 238 0.95 6.93% -0.18% -0.28% -2.11% 4.80 -0.53% 4.89% 5.47 2.36% 1. J2).09 4.22% -2.09% 1.28% 6.09 1.12 995 -0.41% -0.55% -0.67% -0.73 -1.44 -0.19 2. CAAR t-statistic Sales CAAR t-statistic 713 0.76 -3.71 -0.87% 0.31 1.30 -0.64 571 -0.39 -2.12 1.45% -0.39% -4. All CAARs have been computed in an event-study framework as proposed by MacKinlay (1997).41% -0.39% -0.638 0.39% 6.34% 2.17% 0.69 2.00% -4.39 CAAR CAAR CAAR (0.12% -2.20 -0.86 3.45% -2.76% 0.48% 3.44% -3.59 -1.1%*Mcap) N 130 0.16% 3.65 -2.88% -2.95 -4.41% 2.15 1.31 2.85 2.73% 0.75 -3.14% 0.73 694 -0.13 -0.31% -1.59 -0.53% -2.82 0.97% -0.59% -3.63% 2.88 0.04% -0.10% 0.37% -3.24% -0.54 -0.03% 2.52% 3.68% -1.87 -1.17% 1.67% -2.-1) CAAR (0.86 1.88 2.62% -0.83% 5.72% -3.56 2. t-statistic is the lowest absolute value of all four test statistics applied for each CAAR and Observation (tCAAR.05 2.02% -3.81% -3.38 486 -0. Large transactions are (net) purchases and sales that are larger than 0. K.23 -9.33 3.35 0.49% 8.31% -4.64 7.72 603 0.069 6.62 580 0.253 -0.49% 2.51 -2.13% -0.49% -0.97 517 0.55 337 1.33 1.34% -1.48 -2.80% 1.182 0.75% 6.00% 0.94% 4.76 -0.85 -1.62 2.42% 0.63 7.23 -3.40 35 5.20) Panel B: Large Transactions (> 0.59 -0.48% 5.15% -3.75% 5.31% 1.19% -0.34% -1.55% 5.75% 4.39 2.52% 1.34 -2.47 -0.04 1.1) (0.191 0.54 1.89 1.63 1.05 1.49 1.27% -2.76% -1.41 -1.-1) CAAR (0.87 4.22% 2.50% -0.64 581 -0.170 1. The market return is approximated by the corresponding (Gross) MSCI Barra Performance Share Index for each single country.60% -5.79 75 1.27% 4.52 2.006 1.70 6.51% -3.17 0.80% -1.06% 1.605 -0.

35 1.32% -1.49 0.07% 0.57 0.90 0.33 5.4) CAAR (0.02 CAAR (0. CAAR (0.26 -1.33 -0.50 -0.4) CAAR (0.57 -0.74% 6.29 -0.25% 5.65 -0.28 0.4) CAAR (0.04% -0.72 -0.52 -0.41 CAAR (0.34 -0.30% 2.49 -1.02% 3.15% 1.34% 2.99 -0.34 2759 1347 1085 0. J2).11% 0.76 -1.49% 0.53% -0.72% -1.1) Ireland 2.60% -1.96 -0. 2.49 1. J1.91 -0.03 -0.24% -0.13 Italy 2428 1362 1577 0.00% 7.36 0.24 2.4) for Large Insider Trades by Insider Class This table reports the cumulative abnormal returns of all transactions by insider class (for detailed description of insider classes see Table IV).60 1.68 0.41% 1.21% 0.22% 1.68 CAAR (0.43% 0.51% -3.97 228 235 117 0.80% -2.78 -1.66 -0.32 1.18% -0.02 0.92 -0.38% -2.82% 0.03% 0.61% -1.41% 2.74% -2.47% 6.61% 2.60 -0.77% 0.67% -0.56% -2.39% 7.53% 2.43 0.89 -0.33 -0.36 -0.48% -1.00 -0.20% -1.40 -0.01% -2.03 -0.82 -0.07 -1.70% -2.29 -0.13% -0.33 -0.59 -0. trank.78 -0.31% 2.43% -3.02 0.26 0.84 -0.19 -0.89% 1.1) France 0.19% 1.16 0.28% 0.09 628 771 702 169 203 199 485 1692 1428 856 999 643 37 .81% -1.01% 0.26% -1.26% -0.48% 5.26% 0.13% -1. t-statistic is the lowest absolute value of all four test statistics applied for each CAAR and Observation (tCAAR.23 130 45 162 1.36% -2.24 0.63% 4.88% 1.74% 4.93% -3.81 2.42 1.06 -0.16 -0.40 -0.K.36 -0.07 0.44% -2.24% -0.30% 0.77% -1.87 0.10% 0.67 1.30 -0.99 3.74% -2.44% 2.63% 3.66 -0.95% 5.07% -0.10 -0.12 0.24% -2.49% 1.24 0.16 -0.89 -0.1) Germany 1.47% -2.4) N Purchases Insiderclass A t-statistic Insiderclass B t-statistic Insiderclass C t-statistic Sales Insiderclass A t-statistic Insiderclass B t-statistic Insiderclass C t-statistic Purchases Insiderclass A t-statistic Insiderclass B t-statistic Insiderclass C t-statistic Sales Insiderclass A t-statistic Insiderclass B t-statistic Insiderclass C t-statistic N N N 76 113 49 1049 608 596 955 872 864 22 33 17 Netherlands 0.41% -1.08 Sweden 1172 2845 3165 0.13 3992 1381 3497 2.39% -2.92% 1.27% -0.69% -1.64% -2.60% -1.67 0.34% 4.76 U.27% -1.18% 1.40% 0.52 1.97 -0.78 0.83% -3.36 0.15% 1.33% 3.1)/ (0.48 0.42 3.54% 2.79 -0.97 -0.81 CAAR (0.08% 1.39 1639 216 783 0.01 0.14% -0.Table VI CAARs (0.89 0.42% -1.85 -0.21% 8.59 1.65% -2.34 -0.22% 1.90% 7.87% 0.39% 0.72% 0.1) Austria 329 247 137 0.48 0.

546) 0.049) -0.0045*** -0.083) 0.0016 (3.**.0058 (-1.902) -0. and zero otherwise.0015 (-0. IT.623) -0.318) (0. Industrials.876) -0.0513** -0.467) -0.0011 0.847) 0.282) -0.872) -0.0034** (-2.561) Frequent trading 0.560) -0.102 38 .522) (-0.297) Day gap 0. -0.700) 0. Day gap is the difference (in business days) between trade and announcement day.437) -0.671) -0.0412*** (3.096) (-0.588) -0.0226*** 0.0079 (-1.0120* (1.922) 0.393) -0.0005 (0.0000 (0.743) 0.3832*** 0.692) 0. Insider class C (low-level and non-executives).324) (0.933) -0.501) 0.0004 (-0.0232*** 0.344) 0.882) Transaction size 0.614) -0.930) France 0.506) 7182 0.0037*** (4. Insiders are categorized into three groups (for detailed categorization see Table IV): Insider class A (top-level executives).675) -0. Consumer Staples.0036 (-0.183) 0.0032* (1.190) (-0.0018 0.098) -0.717) -0.512) 580 0.0045 0.188) -0.572) (0.0031 (-0.625) 0.0056*** (3.282) Previous sell 0.0017 (-1.0029 (0.230) -0.0068 -0.397) 0.294) -0.009 Sweden -0.995) (-0. Standard errors are adjusted for heteroscedasticity and tstatistics are reported in parentheses.0024 (-0.021 Panel A: All Purchases Germany Ireland Italy -0.0128 (-0.0010 (-0.0002 (0.0036 (-0.0364** 0.0014 (-0.0029 (-1.0094 -0.591) -0.0046 0.0851 0.0532*** -0.0088*** (-3.683) -0.646) -0.0022* (-0.0160*** -0.560) 0.0239*** (-5.137) -0.346) (0.312) 0.348) -0.351) (0.593) -0.282) -0.0009 (0.0506 (0.0028 -0. Consumer Discretionary.974) (0.0042 (-0.624) -0.0030** (-2.0115*** (-4.0014 (-0.247) -0.631) -0.260) Multiple trade -0.991) -0.523) 0.317) -0.282) (-0.638) 0.0114*** (5.062) -0.0270 -0.710) (-1. Momentum measures the performance of shares 100 trading days prior to the transaction day.014) -0.143) (-0.412) -0.0001 (0.1604*** (12.457) -0.3483*** (4.0264*** 0. Book to market is the book to market value at the beginning of the year when the transaction took place.0136 0.0002 (0.254) -0.0050 0.882) 5191 0.008 Netherl. respectively.0202 (-0.0013 (-1.456) -0.679) -0. Frequent trading is set to one if the average trade frequency in the respective firm is higher than the average trade frequency of all firms in the respective country.0040*** (-0. Previous buy (Previous sell) is set to one if there has been at least one purchase (sale) announcement 20 days before the respective announcement. Insider class B (mid-level executives).419) (0.0101** (-2.0154*** (-3.306) (0.883) -0.0127 (-0.0031 0.0022 (-0.0054 (-0.496) -0.111) Book to market 0.0001 (-0.178) (0.006 0.0061 -0.467) Observations Adjusted R2 712 -0.1) as the dependent variable.0002 0.0013 (1.0108 (1.0028 (-1. is set to one if the transaction has been performed after the implementation of the Market Abuse Directive 2003/6/EC.3199 (1.0013*** (-5.567) -0. 0.Table VII Market Reaction to European Insider Trades by Country This table shows multivariate OLS regressions with CAAR(0.571) (0.834) -0.0002 (-0.0003 (-5.0045*** (3.171) 0. Multiple trade is set to one if more than one insider of a company trades on the same day.0023 (0.390) -0.0023 -0.023 U. Insider class A is the base category. *.849) -0.0003 (-0. and 1% level.435) 2638 0.101) IT -0.122) -0.702) (0.805) 0.074) (0.0030 (-1.0135*** (-3.0204 (-1.0027 (-1.0053 (-1.904) 0.770) (-2.887) -0.741) -0.662) 0.0004 (-0.*** indicate significance at the 10.057) (-2.294) (-0.0050 (0.922) 0.0017 0.0214 (0.0202*** 0. Consumer Sta.376) 0.035) -0.0072** (-2.242) -0.612) (3.018) -0. Legal change.0132 (-1.0036 -0.595) 0.736) -0.308 5367 0.0013 -0.777) 0.557) (-1.485) (-1.0003** (-2.0112*** (-3.541) -0.0088 (1. Healthcare is the base category.0014 (0.934) 0.0005 (0.0091* (-1.0084 (4.044) 0. Energy.386) -0.028) 8870 0.0002 -0.0011 (0.709) 3.0004** (-1.0063 0.815) 0.0239* -0.0181 (-1.0042 (-0.818) (3.0007 (2.446) (-0.0030 (0.0013 0.0011 (-0.083) -0.0007 (-0.0004 (1.157) Constant -0.0039 0.894) 0.0076* (-1.463) (1.182) Previous buy -0.444) -0.0004 (0.125) -0.0065 (-1. Financials.311) (2.0007** (-2.0060*** (-2.030 337 0.045) Insider class B Insider class C Energy Materials Industrials Consumer Dis.0052 (-0.544) -0.669) -0.632) (3.0019 (-0.0013 (1.2909*** 12.482) -0.837) (-2.0012 0.0076 (-1.293) (2.0039 (-1.0002 (0.0054* (-1.0026 (-1.0026*** 0.0036 (-1.0057*** (-2.0011 (-0.758) 0.0486 (2.0081 (-1.0109** (-2.0012 (0. Transaction size is the relative size of a transaction based on the shares outstanding on the trading day.350) (0.0051 (-0. 5.0048* (-1.989) -0. Financials -0.674) 0.523) Firm size 0.918) (1.1451 (0.933) 0.327) (0. All models include year dummies.612) (2.0070*** (-12.0038 (1. Sector dummy variables are categorized as follows: Healthcare.0028 (-0.0381 (-0. Firm size is calculated as the natural logarithm of the shares outstanding multiplied by the closing price of the underlying share on the trading day. Austria -0.917) Legal change -0.0196*** (3.779) (0.0032 (0.564) -0.0009 (0.K.313) 0.0015 0.0045 (0.0048 0.0322*** (6.0139 (-1.050) 0.706) -0.863) (2.0012 (-0.0027 (-0.0044*** 0.449) Momentum -0. and zero otherwise.094) (0.347) 0.

314) -0.951) 0.273) -0.864) 0.223) 0. 0.271) (-1.0112 (1.084) 0.0014 (0.789) -0.003) -0.0021 (-0.082) 0.0496 (0.0147*** (-3.655) (-1.0061 (-1.207) -0.376) -0.441) -0.854) 0.0004 (0.0144 (-1.0002 (-0.540) -0.0035 (1.0018 (0.855) 0.012) -0.992) -0.0030 (-1.011 U.0001 (-0.0252 (0.224) (1.694) (0.001) 0.192) -0.0010 (0.914) (-1.371) 0.442) 0.555) 0.070) -0.0016 (-1.0048 (2.297) -0.095) -0.0064 (-0.499) -0.080) 0.0658 (-0.654) (0.0211 (1.0084 (-0.0130 (0.905) -0.649) (-0.586) -0.0011** 0.240) 0.024 Sweden 0.0455 0.154) -0.149) -0.0029 (-0.0014 -0.0130*** (-4.0037 (-1.0033** (-2.583) 0.0034 (-1.0009 (-0.0041 -0.249) 0.0188** (-2.032) (0.020) -0.0047** (2.0032 (-0.531) -0.0024 (0.0103*** (-2.458) -0.604) 0.312) 0.0000 (0.020) -0.0064 (0.212) -0.0001 (0.0020 (0.924) 0.0011 -0.308) 0.277) 0.073) -0.0002 (0.0000 (-0.539) 0.041) -0.0029 -0.0013 0.258) -0.0189 (2.0042 (-1.Continued Austria -0.0258 (0.0006 -0.382) (-1.320) -0.752) -0.0033 0.0058* (-1.255) -0.4385* (1.544) -0.0004 (-1.986) 0.0022 (0.349) -0.0009 (0.150) -0.074) (-1.268) (-0.241) -0.0179* -0.374) 0.0038 (-1.0014 (0.0014 (0.0176* (-1.0101 (-0.0095** (-2.0282 (1.0026 (1.0058 (-1.167) 0.980) 0.288) 2498 0.458) Insider class B Insider class C Energy Materials Industrials Consumer Dis.0005* (1.0015 (-0.0213 (-1.0012 (-0.0049 (0.180) 0.0247* (0.928) 0.039) 0.0127 (1.0091*** (-2.771) 0.193) 0.308) (-0.0004 (-0.282) -0.0034 (-0.0771** (2.232) 0.0075* (1.270) -0.598) -0.0026 -0.422) -0. Consumer Sta.0014 (0.841) -0.0005** -0.094) -0.939) 0.249) -0.0188 (1.0276 (0.0014 -0.317) 3605 0.0489** (1.0003 (0.0131 (-1.0114 (-1.0103 (-0. Financials IT Multiple trade Transaction size Firm size Momentum Book to market Frequent trading Previous buy Previous sell Day gap Legal change Constant 0.867) 2101 0.0134*** (-3.183) 2253 0.0003 (0.409) 0.0000 (-0.0013 (-0.537) 0.530) -0.0060 -0.679) -0.696) -0.0072 (-0.361) -0.453) 571 0.0126*** (-3.871) -0.024 Observations Adjusted R 2 39 .0168*** (-3.0370 (-0.0084 (0.016 Panel B: All Sales Germany Ireland 0.287) (-0.0094 (-0.0001 (0.0295 (0.096 Italy -0.886) -0.140) -0.167) -0.0019 (0.0075* (-1.0107*** (-3.007) 0.0043 (-1.0037 (-0.0873* (-1.0128*** (-4.0031 (-2.0076** (-2.128) France 0.180) -0.0853* (1.604) -0.0036 (1.695) -0.664) -0.0020** (1.0049 (0.520) 0.280) -0.1148 (1.0012 (-0.593) 0.0034 (-1.026) -0.278) -0.0460 (1.274) -0.Table VII .0060 (0.0057* (-1.0004** (-2.0035 (-1.057) 0.561) -0.0007 (-0.0091** (-2.212) (0.0002 (-0.0008 (-0.0018 (-0.386) -0.0013 (-0.847) 0.0099 (-0.0020 (0.966) 0.406) 0.0021 (-1.0551 (1.K.0008 (-1.372) 0.0366 (-1.378) (1.0274 (1.822) 0.289) (0.057) 0.0021 (1.0004 (-0.213) 0.0043** 0.119) (-0.856) -0.402) -0.390) (-0.869) -0.0050** 0.706) 0.591) 0.108 0.0034 (0.0003 (0.227) -0.017 Netherl.919) -0.590) 0.0029 (0.043) 0.303) -0.998) -0.422) -0.332) -0.942) 0.0006 (0.1252 (-1.0023 (0.710) 0.789) -0.653) 238 0.933) -0.0025 (1.877) 2691 0.0032 (1.0019 (-0.0058 (-0. 0.254) -0.0006 (-0.343) 0.0037 -0.335) -0.0003 (-0.177) -0.010 69 -0.067) 0.734) -0.554) 0.084) 0.0011 (-2.0027 (0.0011 0.

11 1.77% 7.59 -0.26 3. t-statistic is the lowest absolute value of all four test statistics applied for each CAAR and Observation (tCAAR.31 -1.59 0.47% -1.12% -4.78% -2.79 1.58% 7.98% 4.28 1.86 2803 -0.11 1.14% -2.50% -1.05% 2.1) CAAR (0.Table VIII Cumulative Abnormal Returns for European Insider Trades by Industry Sectors This table reports the CAARs for directors’ trades between 01/2003 and 12/2009 for eight European countries.4) CAAR (-20.40% -1.58 1.10% 6.19 1.44 1.57% 4.63 5706 0.60% 6.23% -0.98 596 -0.83 1851 0.-1) CAAR (0.71% 2.30 1.30 0.86% 6.25% -4.99% -7.37% -3.33% 2.30% 5. All Transactions Sector N Energy Purchases CAAR t-statistic Sales CAAR t-statistic Purchases CAAR t-statistic Sales CAAR t-statistic Purchases CAAR t-statistic Sales CAAR t-statistic Purchases CAAR t-statistic Sales CAAR t-statistic Purchases CAAR t-statistic Sales CAAR t-statistic Purchases CAAR t-statistic Sales CAAR t-statistic Purchases CAAR t-statistic Sales CAAR t-statistic Purchases CAAR t-statistic Sales CAAR t-statistic 927 1.12 950 -0.40% -7.02 -0. J2).26% -5.24% -1.30 3106 -0.49% -0.91 2.07 464 -0.24 -3.76% 4.57% 3.92% 5.67% 5. Sector categorization is provided by COMPUSTAT.64% -3.43 0.38% -1.35% 5.30 2.61% 4.51 -1.83 -3.02 -2.56% 3.81% 4.63% -3.01 1.27 1.03 3.45% -3.67 -0.98 -2.67% -4.38 -2.10% -0.51 -0.39% -2.30 7118 0.50% -1.65 1.56 4900 1.99 0. trank.80 CAAR (0.03% 6.60% -0. J1.83 7146 0.87 1607 1.01 1.70 1.03 3.45% -6.72 -3.29 -1.84% 2.95 -2.03% 2.50 608 -0.29 -1.51% 4.83% -5.13 -0.62 -2.19% -1.20% 5.64% 2.25% -2.11% 4.17 -2.51% -0.20) Materials Industrials Consumer Discretionary Consumer Staples Health Care Financials IT 40 .41% -5.56% 6.68% -7.72 1214 0. The market return is approximated by the corresponding (Gross) MSCI Barra Performance Share Index for each single country.69 -0. An estimation window of 180 trading days and an observation window of 41 days centered on the announcement day have been used.44% 1.94 -2.89 -0.54 3034 -0.18 4.14% 6.54% 2.60% 5. All CAARs have been computed in an event-study framework as proposed by MacKinlay (1997).48% -3.90 -0.11 -2.53 2419 -0.13% -4.92% 4.62 -2.35 1.

000439 (0. Insider class B (mid-level executives).Table IX Market Reaction to European Insider Trades This table shows multivariate OLS regressions with CAAR(0. Transaction size is the relative size of a transaction based on the shares outstanding on the trading day.00111 (0.000421 (-0. and 1% level.356) 14029 0.00276* (-1.228*** (3.274) 0.00166** (-2.030) -0. Consumer Discretionary.000673 (0. Day gap is the difference (in business days) between trade and announcement day. Standard errors are adjusted for heteroscedasticity and t-statistics are reported in parentheses.009 Insider class B Insider class C Energy Materials Industrials Consumer Dis.746) -0.952) -0.00259 (-1. Consumer Sta.175) -0.843) -0.00780*** (-4. Multiple trade is set to one if more than one insider of a company trades on the same day.00119 (1. and zero otherwise.000272** (-2.136) 0. Firm size is calculated as the natural logarithm of the shares outstanding multiplied by the closing price of the underlying share on the trading day.878) 0.988) -0.0195) 0.239) -0. Legal change.900) -0. and Insider class C (low-level and non-executives).**.354) -0.00621*** (-3.00549*** (-3. Financials IT Multiple trade Transaction size Firm size Momentum Book to market Frequent trading Previous buy Previous sell Day gap Legal Change Constant Observations Adjusted R 2 41 . Financials. and zero otherwise.585) 0.00322*** (-15. respectively All Purchases -0.542) -1.000144 (-0. is set to one if the transaction has been performed after the implementation of the Market Abuse Directive 2003/6/EC.00171 (-0.207) 0.294) 0. Sector dummy variables are categorized as follows: Healthcare. Book to market is the book to market value at the beginning of the year when the transaction took place.0799*** (14.167) 0.728) -0.926) -4.00170** (2. Consumer Staples.270) 0.0349 (1.00830*** (-4.562) -2.00267** (-2.000190** (-2.601) -0.0110*** (-4.0297) -0.503) 0.010) -0. Healthcare is the base category.227) 0.000167 (0.00240* (-1.00410** (-2.160) -8.51) 30878 0.54e-05 (-0. Insider class A is the base category.579) -0.00176 (-1.1) as the dependent variable.0187*** (-8.630) -0.399) 0.66e-05 (-0. Frequent trading is set to one if the average trade frequency in the respective firm is higher than the average trade frequency of all firms in the respective country.053 All Sales 0. IT.00645) -0.00198 (0. Energy.00196*** (-2. Previous buy (Previous sell) is set to one if there has been at least one purchase (sale) announcement 20 days before the respective announcement.00712*** (7. 5. Momentum measures the performance of shares 100 trading days prior to the transaction day. All models include country (which are all significant at the 1% level except for Ireland) and year dummies.734) -0.31e-05 (-0.065) -0.00283** (-2.77) -0.00151** (2.000792 (-0.*** indicate significance at the 10.249) -0. Industrials.66e-05 (-0.00292** (2. Insiders are categorized in three groups (for detailed categorization see Table V): Insider class A (top-level executives).070) -0.210) -0. *.00493*** (-2.