The Association between Insider Trading and Analyst Forecast in Korean Stock Market

Sohn, Sung Kyu; Kim, Sang Il; Goh, Jai Min

Korean Journal of Financial Studies 2009;38(3):393-422.
Published online September 30, 2009.

Sung Kyu Sohn, Sang Il Kim, Jai Min Goh

내부자 거래와 재무분석가 이익예측 특성의 상관성 연구

손성규, 김상일, 고재민

Abstract

This study tests the effects of insider trading on analysts` earnings forecast characteristics, for the Korean stock market. Different from prior studies, it tests market efficiency of insider trading in view of better informed investors, financial analysts. Empirical results are as follows. First, analysts` forecast accuracy becomes higher as the insider trading volume becomes larger, indicating that the current policy of insider trading disclosure provides analysts with the information enough to forecast the future earnings accurately. Second, as the buying volume of insider trading becomes larger, forecast bias becomes bigger, showing that insider trading disclosures provides the information for the future earnings direction. Third, as the insider trading volume becomes larger, the analyst forecast dispersion becomes bigger, indicating the larger information heterogeneity among analysts who analyze the specific firm. Lastly, the results show that as the insider trading volume increases, the commonality of information decreases, which means that the level of the information released in public decreases. These results suggest that the current rule of insider trading disclosure reduces the information asymmetry in that it provides the useful information for analysts to predict future earnings. On the other hand, the insider trading disclosure does not yet reduce information asymmetry in that the forecast dispersion among analysts still exists.

Key Words: 공통정보 의존도,내부자 거래,예측 낙관성,예측 정확성,예측치 분산,Forecast Accuracy,Forecast Bias,Forecast Dispersion,Insider Trading,the Commonality of Information