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[email protected] Does Cross-Listing Mitigate Insider Trading? Adriana Korczak and Meziane Lasfer Cass Business School, London
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[email protected] Does Cross-Listing Mitigate Insider Trading? Adriana Korczak and Meziane Lasfer Cass Business School, London.

Dec 26, 2015

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Page 1: M.a.lasfer@city.ac.uk Does Cross-Listing Mitigate Insider Trading? Adriana Korczak and Meziane Lasfer Cass Business School, London.

[email protected]

Does Cross-Listing Mitigate Insider Trading?

Adriana Korczak and Meziane Lasfer

Cass Business School, London

Page 2: M.a.lasfer@city.ac.uk Does Cross-Listing Mitigate Insider Trading? Adriana Korczak and Meziane Lasfer Cass Business School, London.

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Introduction• Evidence that insiders trade profitably around major

corporate events using private information– Bankruptcy protection: Seyhun & Bradley (1997)– New issues: Karpoff and Lee (1991) – Buybacks: Lee, Mikkelson & Partch (1992) – Earnings forecasts: Penman (1982)– Takeovers: Seyhun (1990), Bris (2005)– Dividend announcements: John and Lang (1991)– Exchange listings/de-listings: Lamba and Khan (1999)

• Evidence that insiders earn significant exceptional returns – US: Jaffe (1974), Finnerty (1976), Seyhun (1986), Lakonishok and

Lee (2001)– U.K: Pope et al (1990), Gregory et al (1994) & in other countries…

• But is Insider Trading profitable after transaction costs?

Page 3: M.a.lasfer@city.ac.uk Does Cross-Listing Mitigate Insider Trading? Adriana Korczak and Meziane Lasfer Cass Business School, London.

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Issues: Should insider trading be regulated?

• What and How to regulate – Controversies:– What is insider trading and who is the insider– How to treat non-information trading (e.g., portfolio

changes, liquidity) and trading on miss-valuation

• Insider trading should not be regulated because: – It increases market efficiency, thus,

• Prices will reflect all information – Closer to strong form EMH• Signalling Buy (sell) trades to signal under- (over-) valuation

• Insider trading should be regulated because: – Trading on private information implies transfer of wealth– Decrease market efficiency through

• Reduction in liquidity• Informed investors set up strategies to mimic insider trades

Page 4: M.a.lasfer@city.ac.uk Does Cross-Listing Mitigate Insider Trading? Adriana Korczak and Meziane Lasfer Cass Business School, London.

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Objective of the paper• Test whether cross-listing mitigates the trading on

insider information• The legal and reputational bonding hypotheses

• UK and US roughly same governance, thus not testing the bonding hypothesis as defined by (Cofee 1999, 2002; Stulz, 1999)

• Cross-listed companies are subject to both domestic and foreign Legislation

– US and UK are relatively complementary – Table 1

• Increased disclosure requirements• Less information asymmetries because more thorough investor

monitoring• Stronger bad image effects…

Page 5: M.a.lasfer@city.ac.uk Does Cross-Listing Mitigate Insider Trading? Adriana Korczak and Meziane Lasfer Cass Business School, London.

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Cross-listing

• Parallel listing on domestic and foreign stock exchanges

• Particularly popular and widely investigated over the last 15-20 years

Listing venueDisclosure

requirementsCapitalraising

Rule 144A Portal Minimal compliance yes

ADR Level I OTC Partial compliance no

ADR Level II AMEX / NASDAQ /

NYSEFull compliance

no

ADR Level III yes

Page 6: M.a.lasfer@city.ac.uk Does Cross-Listing Mitigate Insider Trading? Adriana Korczak and Meziane Lasfer Cass Business School, London.

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Data

• Source– Insider trading - Director Deals Ltd.– Cross-listing - BoNY, NASDAQ/NYSE/AMEX– Stock prices, accounting data and news -

Perfect Analysis

• Sample– 1999-2003– 928 UK companies (CL = 115, 12%)

– Total number of observations - NALL=13,529 (CL = 18%, BuyALL = 78% (CL = DL))

Page 7: M.a.lasfer@city.ac.uk Does Cross-Listing Mitigate Insider Trading? Adriana Korczak and Meziane Lasfer Cass Business School, London.

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Description of the data (1) Table 2

Cross-Listed Cos(CL)

Domestically-Listed Companies (DL)

t CL – DLMann-Whitney

Panel B Fundamentals (Firm-Years)

Buy Trades Market Cap (£m) Dividend Yield M/B ROA

19,5125.007.780.03

4,8453.911.990.04

8715.172.310.02

1434.281.410.01

18.77-1.102.184.71

0.000.000.000.00

Sell Trades Market Cap (£m) Dividend Yield M/B ROA

18,0112.97

19.560.07

5,6422.453.070.07

6393.223.250.03

1702.402.250.02

10.27-0.941.78

11.41

0.000.360.000.00

Mean Median Mean Median

Page 8: M.a.lasfer@city.ac.uk Does Cross-Listing Mitigate Insider Trading? Adriana Korczak and Meziane Lasfer Cass Business School, London.

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Description of the data (2) Table 2

Panel B Insider Trading (All Observations)

Buy Trades % Holding Shares Traded Trades per Day Top Management Trades Number of Observations

0.98% 0.01% 2.96

17.55 1,913

0.00% 0.00% 2.00

13.00 1,913

1.29% 0.10% 2.18

10.67 8,354

0.01% 0.01% 1.00 8.00

8,354

0.08 0.00 0.00 0.00

0.00 0.00 0.00 0.00

Sell Trades % Holding Shares Traded Trades per Day Top Management Trades Number of Observations

0.83% 0.15% 1.77 5.28 417

0.00% 0.00% 1.00 3.00 417

2.35% 0.40% 1.87 4.69

2,496

0.03% 0.04% 1.00 3.00

2,496

0.00 0.00 0.22 0.41

0.00 0.00 0.44 0.95

CL DLMean Median Mean Median t MW

Page 9: M.a.lasfer@city.ac.uk Does Cross-Listing Mitigate Insider Trading? Adriana Korczak and Meziane Lasfer Cass Business School, London.

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Methodology• Event study methodology

– Event day [day 0]• Insider trading announcement date• Insider trading date

– Event window [-100; +100]

• Estimation window [-360; -101]

• News announcements

• Regressions – – OLS– To account for fundamental characteristics of cross-listed firms (Reese and

Weisbach, 2002; Doidge et al., 2004): Larger, higher growth and profitability • 2SLS and 2-stage Heckman estimation (Heckman, 1978)

Page 10: M.a.lasfer@city.ac.uk Does Cross-Listing Mitigate Insider Trading? Adriana Korczak and Meziane Lasfer Cass Business School, London.

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Summary of the results

-0.10

-0.05

0.00

0.05

0.10

0.15

-100 -90 -80 -70 -60 -50 -40 -30 -20 -10 0 10 20 30 40 50 60 70 80 90 100

Buy Trades

CL

DL

DL

CL

Page 11: M.a.lasfer@city.ac.uk Does Cross-Listing Mitigate Insider Trading? Adriana Korczak and Meziane Lasfer Cass Business School, London.

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Empirical Results

Cross-Listed (CL) Domestically Listed (DL)

Event periods CAR t CAR t tCL – DL

Panel A Announcement Day – All events

Buy trades – N 1,954 8,460 -100, -2 -0.083*** (-8.56) -0.066*** (-14.95) 2.04***

-1,+1 0.002 (1.03) 0.015*** (19.59) 7.22***

+2, +40 0.020*** (3.34) 0.043*** (15.52) 5.05***

+2, +100 0.019 (1.94) 0.073*** (16.68) 7.06***

Sell trades – N 426 2,532

-100, -2 0.099*** (5.78) 0.127*** (18.51) 1.73*

-1,+1 -0.003 (-1.12) -0.004*** (-3.44) -0.33 +2, +40 0.011 (1.05) -0.023*** (-5.37) -3.65***

+2, +100 0.014 (0.80) -0.053*** (-7.77) -4.08***

Page 12: M.a.lasfer@city.ac.uk Does Cross-Listing Mitigate Insider Trading? Adriana Korczak and Meziane Lasfer Cass Business School, London.

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OLS Regressions

OLS Buy Sell

(1) (2) (3) (4)

CARs (+2;+100)

Constant 0.21*** (17.30) 0.20*** (15.76) 0.15*** (7.85) 0.16*** (7.75)

CL -0.06*** (-6.25) -0.06*** (-6.01) 0.06*** (2.94) 0.06*** (2.90)

Shares Traded 3.96*** (4.55) 3.96*** (4.56) 1.41*** (2.71) 1.42*** (2.73)

% Holding -0.07 (-1.21) -0.10* (-1.72) 0.01 (0.09) 0.02 (0.17)

Multiple Trading per Day 0.01 (1.35) 0.01 (1.16) -0.05*** (-3.83) -0.05*** (-3.78)

Top Management 0.03*** (3.41) -0.01 (-0.90)

Year Dummies Yes Yes Yes Yes

Industry Dummies Yes Yes Yes Yes

N 10,266 10,266 2,912 2,912

Adj. R2 0.07 0.07 0.18 0.18

Page 13: M.a.lasfer@city.ac.uk Does Cross-Listing Mitigate Insider Trading? Adriana Korczak and Meziane Lasfer Cass Business School, London.

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Regressions – Selectivity BiasSelectivity Bias Buy Sell

PROBIT 2SLS HECKMAN 2SLS HECKMAN

(1) (2) (3) (4) (5)

CARs (+2;+40)

Constant -22.79*** (-52.51) 0.11*** (14.97) 0.31*** (17.49) 0.08*** (6.60) 0.25*** (7.92)

CL -0.11*** (-12.98) -0.36*** (-14.31) -0.05*** (-3.37) -0.26*** (-5.67)

0.25*** (13.92) 0.21*** (6.28)

Shares Traded 2.39*** (4.88) 2.38*** (4.88) 0.67** (2.32) 0.61** (2.13)

% Holding -0.02 (-0.62) -0.03 (-0.89) 0.05 (0.89) 0.05 (0.95)

Multiple Trading per Day 0.02*** (4.15) 0.02*** (3.98) -0.01* (-1.91) -0.01* (-1.95)

Top Management 0.00 (-0.30) 0.01 (1.25) -0.01 (-1.50) -0.01 (-1.41)

Market Cap 1.03*** (50.43)

M/B 0.00* (1.90)

Year Dummies Yes Yes Yes Yes

Industry Dummies Yes Yes Yes Yes

N 13,215 10,266 10,266 2,912 2,912

Pseudo R2 0.5387

Adj. R2 0.06 0.06 0.13 0.15

Page 14: M.a.lasfer@city.ac.uk Does Cross-Listing Mitigate Insider Trading? Adriana Korczak and Meziane Lasfer Cass Business School, London.

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Robustness checks• Confounding events [-5, +5]

– Same results• Announcement day vs. Trading day

– Similar results– Announcement dates provide more information than

trading dates• Bull vs. bear markets

– Cross-listed companies: More information in bear period– More differences in domestically-listed firms

• Alternative event study methodologies– Same results using market adjusted model, mean

adjusted model…• Control sample – Size effect, similar results

Page 15: M.a.lasfer@city.ac.uk Does Cross-Listing Mitigate Insider Trading? Adriana Korczak and Meziane Lasfer Cass Business School, London.

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Impact of News AnnouncementsPre-event – Buy trades

N All CL DL

All % CL CAR CAR CAR CL – DL

Panel A. Buy transactions

-40 to -2 All Board changes Results Forecasts Capital structure Restructuring Ownership General business Miscellaneous Other

21,885 1,837 5,436

615 3,414 2,987 1,766 1,129 2,350 2,351

35% 27% 24% 39% 44% 43% 24% 43% 37% 45%

-0.009 -0.001 -0.008 -0.131 -0.009 0.002

-0.004 0.002

-0.005 -0.007

*** *** *** *** * ** ** **

-0.006 0.005

-0.007 -0.047 -0.007 0.000

-0.011 0.001

-0.007 -0.009

*** ** ** *** *** ** ** **

-0.010 -0.004 -0.009 -0.184 -0.011 0.004

-0.003 0.003

-0.004 -0.005

*** * *** *** ** ** * * **

0.003 0.009 0.001 0.137 0.004

-0.005 -0.008 -0.002 -0.003 -0.004

** ** *** * **

Page 16: M.a.lasfer@city.ac.uk Does Cross-Listing Mitigate Insider Trading? Adriana Korczak and Meziane Lasfer Cass Business School, London.

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Impact of news announcementsPost-event – Buy trades

N All CL DL

All % CL CAR CAR CAR CL – DL

Panel A. Buy transactions

+2,+40 All Board changes Results Forecasts Capital structure Restructuring Ownership General business Miscellaneous Other

19,152 1,551 2,606

607 3,903 2,536 2,009 1,287 2,481 2,172

40% 29% 36% 33% 47% 47% 27% 49% 37% 43%

0.005 0.009 0.005

-0.022 0.000 0.010 0.005 0.015 0.000 0.011

*** *** ** *** *** ** *** ***

0.001 0.006 0.001 0.011

-0.002 0.003 0.006 0.004

-0.004 0.004

** ** **

0.007 0.010 0.007

-0.039 0.003 0.016 0.005 0.025 0.003 0.017

*** *** *** *** * *** ** *** ***

-0.006 -0.005 -0.005 0.050

-0.005 -0.013 0.001

-0.021 -0.007 -0.013

*** ** *** ** *** *** ** ***

Page 17: M.a.lasfer@city.ac.uk Does Cross-Listing Mitigate Insider Trading? Adriana Korczak and Meziane Lasfer Cass Business School, London.

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Impact of news: Pre-Sell trades

N All CL DL

All % CL CAR CAR CAR

CL – DL

Panel B. Sell transactions

-40 to -2 All Board changes Results Forecasts Capital structure Restructuring Ownership General business Miscellaneous Other

5,538

360 1,725

90 718 878 439 300 610 418

30% 27% 24% 39% 32% 31% 21% 32% 36% 48%

0.011 0.010 0.012

-0.012 0.014 0.017 0.003 0.023 0.001 0.009

*** ** *** *** *** *** **

0.006 0.003 0.006 0.031 0.003 0.009

-0.003 0.019 0.000 0.007

*** ** * ** ** **

0.013 0.013 0.013

-0.040 0.020 0.021 0.005 0.025 0.001 0.012

*** ** *** *** *** *** *

-0.007 -0.009 -0.007 0.071

-0.017 -0.012 -0.008 -0.006 -0.002 -0.005

*** ** ** *** ** *

Page 18: M.a.lasfer@city.ac.uk Does Cross-Listing Mitigate Insider Trading? Adriana Korczak and Meziane Lasfer Cass Business School, London.

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Impact of news: Post-Sell Trades

N All CL DL

All % CL CAR CAR CAR

CL – DL

Panel B. Sell transactions

+2,+40 All Board changes Results Forecasts Capital structure Restructuring Ownership General business Miscellaneous Other

4,913

366 871 135 906 723 534 297 674 407

34% 23% 38% 39% 39% 34% 21% 25% 36% 42%

-0.001 -0.001 -0.001 -0.014 -0.004 0.006 0.001 0.011

-0.008 -0.005

** ** ** **

-0.001 -0.001 0.008

-0.031 0.001 0.006 0.000 0.004

-0.014 -0.009

** *** ** *** **

-0.001 -0.001 -0.006 -0.003 -0.007 0.006 0.001 0.014

-0.005 -0.002

** ** **

0.000 0.000 0.014

-0.029 0.008 0.001

-0.001 -0.010 -0.008 -0.007

** * **

Page 19: M.a.lasfer@city.ac.uk Does Cross-Listing Mitigate Insider Trading? Adriana Korczak and Meziane Lasfer Cass Business School, London.

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Good News Bad News

(1) (2) (3) (4)

IT up to Constant -0.17*** (-74.73) -0.15*** (-72.24) -0.09*** (-71.94) -0.08*** (-65.54)

20 days CL 0.04*** (7.83) 0.03*** (7.84) 0.01*** (3.78) 0.01*** (3.88)

prior to |CAR| News × CL -0.34*** (-3.07) -0.15** (-2.06)

news |CAR| News -0.04 (-0.92) 0.01 (0.27)

release |CAR| Board Changes × CL -0.74* (-1.90) -0.66 (-1.38)

|CAR| Board Changes 0.05 (0.48) -0.11 (0.89)

|CAR| Earnings × CL -1.11*** (-3.56) -0.37** (-2.12)

|CAR| Earnings -1.01*** (-6.60) -0.31*** (-3.61)

|CAR| Forecasts × CL 0.44 (0.71) 0.33 (0.84)

|CAR| Forecasts -0.76** (-2.06) -0.38 (-1.36)

|CAR| Capital Structure × CL -0.01 (-0.08) -0.07 (-0.65)

|CAR| Capital Structure 0.16** (2.54) 0.10** (1.96)

|CAR| Restructuring × CL 0.03*** (2.76) -0.01 (-0.05)

|CAR| Restructuring 0.04 (0.46) 0.08 (1.67)

|CAR| Ownership × CL -0.03 (0.12) 0.00 (0.03)

|CAR| Ownership 0.10 (0.83) 0.10* (1.73)

|CAR| General Business × CL 0.09 (0.40) -0.55* (-1.73)

|CAR| General Business 0.05 (0.43) 0.16*** (3.08)

|CAR| Miscellaneous × CL -0.28 (-1.10) -0.11 (-0.68)

|CAR| Miscellaneous -0.07 (-0.57) 0.03 (0.42)

|CAR| Other × CL 0.04 (0.02) 0.12 (1.01)

|CAR| Other 0.07 (0.75) -0.05 (-0.75)

N 26,369 26,369 27,951 27,951

Pseudo R2 0.01 0.03 0.00 0.02

Page 20: M.a.lasfer@city.ac.uk Does Cross-Listing Mitigate Insider Trading? Adriana Korczak and Meziane Lasfer Cass Business School, London.

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Conclusions• Insiders are informed investors because

– They are contrarians: Negative (Positive) CARs before buy (sell) trades

– Positive (negative) CARs after buy (sell) trades

• Significant differences between cross-listed and domestically-listed companies– Abnormal returns and – news impacts

• are significantly smaller for cross-listed firms

• Implication:– bonding contract limits the propensity of insiders to trade on

insider information • Coffee (1999), Reese and Weisbach (2002), Doidge (2004) and Doidge,

Karolyi and Stulz (2004)

Page 21: M.a.lasfer@city.ac.uk Does Cross-Listing Mitigate Insider Trading? Adriana Korczak and Meziane Lasfer Cass Business School, London.

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Questions

• Why do managers still trade before news is announced, despite the legal constraints?– Is the bonding contract not binding?

• King and Segal (2004), Segal (2005) and Licht (2003)

– Use other markets• US domestic vs. UK cross-listed companies• Other cross-listed companies in US

– Use other news, especially financial analysts forecasts

• Market micros-structure effect – Bid-ask spread – adverse selection problem