Determinants of Insider Trading Profits

Kim, Taekyu; Shin, Jungsoon

Korean Journal of Financial Studies 2014;43(2):359-383.
Published online April 30, 2014.

Taekyu Kim, Jungsoon Shin

내부자거래 초과수익의 결정요인

김태규, 신정순

Abstract

This paper investigates whether corporate insiders earn excess profits by using private information unknown to outside investors or by trading their own firms` stock based on contraian belief. Examining insider trades in the Korea stock market from 2003 to 2009, we document that both the use of private information and insiders` contraian investment strategy have effect on insider trading. This implies that insiders time the market with contraian investment strategy and at the same time exploit private information to earn abnormal returns. We also find the asymmetric effect of insider trading. Insiders trade shares more heavily when they possess good news about future firm value or feel that their companies are undervalued than when they possess bad news or feel that their companies are overvalued. Providing new evidence that insider trading profits are affected by both the use of private information and contraian investment strategy, we suggest that regulators should consider both factors in the regulation of insider trading.

Key Words: 내부자거래,내부정보,마켓타이밍,반대투자전략,비대칭효과,Asymmetric Effect,Contrarian Investment Strategy,Insider Trading,Market Timing,Private Information