Insider Trading and Market Efficiency

6969 WordsAug 15, 201228 Pages
Journal of Finance and Accountancy Insider t nsider trading and market efficiency: Do insiders buy low and sell h high? Stephanie Roddenberry Longwood University Dr. Frank Bacon Longwood University ABSTRACT The purpose of this study was to test the semi-strong form efficient market hypothesis strong using insider sale and purchase announcements and their effect on the risk adjusted rate of return of the firms’ stock price. Past studies using varying methodologies, including the risk adjusted model for event study methodology as used in this study, have found conflicting results have regarding the form of market efficiency upheld in the United States. By definition, a semisemi strong form efficient market would not allow any investor to…show more content…
sider BACKGROUND Efficient market theory examines how accurately stock prices signal resource allocation alloc and fully reflect all available information. Fama (1970) introduced the efficient market hypothesis stating there are three forms of efficiency: weak, semi strong, and strong. A market semi-strong, that incorporates all historical information is said to be weak form efficient, while one that responds to all publicly available informatio is semi-strong efficient. In a semiinformation -strong efficient market, prices instantly change to reflect publicly available information. A strong form market, strong responds to all information, both public and private. The hypothesis claims that achieving above average returns on a risk adjusted basis is impossible (Fama 1970). (Fama, The lowest level of market efficiency, weak form, states that the market only reacts to historical information. This means that no one can earn above normal returns based on published historical information; however, the market does not quickly react to new public or private information. It may be possible then, in a weak form efficient market, to obtain abnormal returns form using either new publicly available or private insider information (Fama 1970). (Fama, A semi-strong form market is more efficient that a weak form, as it reacts to publicly strong available new information quickly and share prices adjust to reflect the market’s reaction. share Obtaining
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