Insider Employee Stock Option Trading and Stock Prices

David Gordon McMillan, Manouchehr Tavakoli, Phil McKnight

Research output: Contribution to journalArticlepeer-review

1 Citation (Scopus)

Abstract

We examine the information content of insider employee stock option trading and its value to market investors using a US dataset. There should be no presumption that option trading would not convey valuable information and indeed the exercise of option rights is likely to signal insider knowledge. Our results from Granger causality tests suggest that the actions of directors, officers (senior management) and the others group, such as company lawyers, do indeed have predictive power for future returns. However, the actions of large shareholders have no additional information content over that which is publicly available. Evidence from predictive regressions largely supports these results but is often weaker in significance. This seems to arise as the Granger causality approach utilises a longer lag length and suggests that it takes time for the market to assimilate the information from insider actions. Overall, the results suggest that any outsider who can mimic the behaviour of certain insider groups could benefit in predicting future returns. Finally, the results confirm the belief that the market is unlikely to be strong-form efficient and that this particularly true with smaller firms. In contrast, larger firms appear to be priced more efficiently than smaller ones.
Original languageEnglish
Number of pages21
JournalEuropean Journal of Finance
Early online date6 Jun 2012
DOIs
Publication statusPublished - 2012

Keywords

  • Insider trades, employee stock option, abnormal returns, market efficiency

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