nep-mst New Economics Papers
on Market Microstructure
Issue of 2022‒07‒18
two papers chosen by
Thanos Verousis

  1. Is Insider Trading Successful? An Extensive Analysis with Buying and Selling Evidence By Dinis Santos; Paulo Gama
  2. Information Flow in Capital Markets - Novel empirical evidence on information processing in financial markets and the role of behavioral biases By Schreiber, Nicolas Stefan

  1. By: Dinis Santos (Faculty of Economics of the University of Coimbra); Paulo Gama (Faculty of Economics of the University of Coimbra)
    Abstract: Purpose: The goal of the present study is to first, understand the market timing capabilities of a set of internal stakeholders while trading (buying and selling) stock, and second, shed some light on some of the characteristics that make them (or not) successful.Design/methodology/approach: We use a relative transaction price approach (RTP) on 842 aggregated trades coming from insiders. These were taken from publicly disclosed information available on the Portuguese regulator. Furthermore, we use a median regression-based method to infer on our conclusions.Findings: We find that insiders buy (sell) at a relatively lower (higher) price when compared to other traders. This shows signs of market timing capabilities. Furthermore, from the studied characteristics, neither the frequency nor gender are good predictors for performance, but the seniority in the organization can help us to understand that some insiders, mostly on the managerial level, might have an edge. Overall, we also find that insiders? trades made OTC generally overperform the ones made on the open market. At last, we find that insiders did not lose any performance during the Portuguese bailout period.Originality/value: By using a thorough analytical approach and a never-used sample of trading data, comprising both buying and selling trades at high-frequency (daily) level, we build on the literature of insider trading as well as on the knowledge around the effects of trading on the open market vs. OTC. We also make yet another contribute towards the literature around the Portuguese bailout effect.
    Keywords: Insider trading, Opportunistic Behavior, Market Timing, Undervaluation, Insiders? characteristics; Gender performance
    JEL: G14 G15
    Date: 2021–07
  2. By: Schreiber, Nicolas Stefan
    Abstract: Since the start of the 21st century, the world has seen a significant proliferation of openly available information. While drastic increases in the availability of information have been observed in all areas of everyday life, they are particularly pronounced in financial markets. In parallel, technological evolution and novel methods of data analysis have significantly altered how information is analyzed and incorporated by investors. Despite its merits for market efficiency and price discovery, this development entails a significant risk of increased information asymmetries due to a higher disparity between sophisticated investors who are able to make use of such technology and those investors who are not. Research has further shown that investors, when provided with too much information at once, are not able to fully comprehend and incorporate all information leading to irrational investment behavior. It is hence of particular importance to fully understand how information is provided, processed, and incorporated in financial markets. While there already exists a growing literature on biased decision-making and information processing in financial markets, research gaps remain. Questions that are, so far, still unanswered in most contexts are, for example: Does the increasing access to information enable sophisticated institutional investors to correctly assess and seize behavioral biases of executives? Are retail investors able to correctly interpret (and potentially devalue) information signals provided by irrational executives? How do investors behave in times of crises and concomitant information overload? Do investors also incorporate the informational quality of public disclosures (and not only its information content) when assessing a firm’s prospects and risks? Do executives anticipate these market reactions and potentially strategically manipulate information signals to provoke market reactions for the firm’s or their own benefit? By conducting four disjunct empirical research studies of which each constitutes one chapter of this dissertation, I hope to close some of these research gaps. More precisely, in the first two chapters, I shed light on whether and how investors react to information signals provided by overconfident executives (Chapter 2) and how information of such executives is perceived in times of crises (Chapter 3). These studies are then further complemented by an analysis of how investors in particularly emotionally charged stocks react to different events in times of particularly high information overflow (e.g., during a crisis) in Chapter 4. Finally, an analysis of whether investors also incorporate measures of informational quality and not only the information itself in their investment decisions and whether executives anticipate and strategically manage investor reactions to certain disclosures concludes in Chapter 5.
    Date: 2022

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