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Does Insider Trading Really Move Stock Prices?

Published online by Cambridge University Press:  06 April 2009

Sugato Chakravarty  and
John J. McConnell
Sugato Chakravarty
Affiliation:
Purdue University, West Lafayette, IN 47907, Consumer Economics, 1262 Mathews Hall and Krannert Graduate School of Management, 1319 Krannert Building
John J. McConnell
Affiliation:
Purdue University, West Lafayette, IN 47907, Consumer Economics, 1262 Mathews Hall and Krannert Graduate School of Management, 1319 Krannert Building
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Abstract

Prior studies have reported a positive correlation between insider trading and stock price changes implying that insider (i.e., informed) trades affect price discovery differently than non-insider (i.e., uninformed) trades. Based on these results, various scholars have argued for the legalization of insider trading to facilitate rapid price discovery. We analyze the trading activity of a confessed inside trader, Ivan Boesky, in Carnation's stock just prior to Nestle's 1984 acquisition of Carnation, and find that our tests are unable to distinguish the price effect of Boesky's (i.e., informed) purchases of Carnation's stock from the effect of non-insider (i.e., uninformed) purchases. Our conclusion survives extensive robustness tests and has methodological and public policy implications.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 34 , Issue 2 , June 1999 , pp. 191 - 209
Copyright
Copyright © School of Business Administration, University of Washington 1999

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