Do German Capital Markets React When Corporate Insiders Exercise Stock Options?

Table of Contents

List of Tables

List of Abbreviations

1. Introduction

2. On Insider Trading
2.1 Review of the Literature on Insider Trading
2.1.1 Evidence from the United States
2.1.2 Evidence from Europe
2.2 The Case of Germany
2.2.1 The Rise of German Financial Regulation

3. Stock Options and how Corporate Insiders Exercise
3.1 About Stock Option Plans
3.2 On Recent Empirical Findings
3.3 Hypotheses Development

4. Data and Methodology
4.1 Data
4.2 Descriptive Statistics
4.3 Methodology

5. Empirical Results
5.1 The Reaction of German Capital Markets to Insiders’ Stock Option Exercises
5.2 Unbiased Analyses of Corporate Insiders’ Stock Option Exercises

6. Conclusion and Outlook

Appendix

References

List of Tables

Table 1: Description of Sample

Table 2: Liquidations, Conversions, and 'Other Transactions'

Table 3: Event Days of the Data Sample

Table 4: Breakdown into Types of Corporate Insiders

Table 5: Cumulative Abnormal Returns around the Exercise and Reporting Day

Table 6: CARs of Liquidations, Conversions, and 'Other Transactions'

Table 7: C-level Executives' Stock Option Exercises

Table 8: Large Stock Option Exercises

Table 9: Description of the Sample after Adjustment for Overlapping Events

Table 10: CARs around the Exercise and Reporting Day after the Adjustment for Overlapping Events

Table 11: CARs of Liquidations, Conversions, and 'Other Transactions' after the Adjustment for Overlapping Events

List of Abbreviations

illustration not visible in this excerpt

1. Introduction

Trading by corporate insiders¹ in their company’s stock and the impact of insider trad- ing on capital markets has long been a field of interest for academics as well as policy makers and regulators who aim to guarantee the effectiveness and fairness of capital markets.² Outside investors are following corporate insiders’ trading behavior closely and might intend to mimic their trading strategies, trying to realize abnormal profits. Newspapers and information services regularly report insider trading activity.³ The term insider trading will generally be used to describe trading by corporate insiders. It does, however, not necessarily imply illegal behavior. Corporate insiders might trade for a multitude of reasons which do not have to include the illegal exploitation of inside in- formation. The definition of corporate insiders might differ from country to country and their corresponding regulations. The differences in the definition of corporate insiders between the US, the UK, and Germany will later be explained.

The academia has provided a multitude of papers on insider trading over different dec- ades (e.g., Jaffe (1974), Seyhun (1986), Rozeff and Zaman (1998), and Lakonishok and Lee (2001)) and research has been conducted to analyze the effects of insider trading on different countries’ capital markets (e.g., Jeng et al. (2003) for the US, Fidrmuc et al. (2006) for the UK, Eckbo and Smith (1998) for Norway, and Betzer and Theissen (2005) for Germany).

The majority of research publications, however, excludes stock option exercises from the analysis. The reasons for the exclusion of stock options are versatile. Early papers on insider trading exclude the exercises due to the complexity of identifying reasons for the exercise of stock options⁴ or the difficulty of getting price information associated with option exercises.⁵ Rozeff and Zaman (1998), Jeng et al. (2003), and Fidrmuc et al. (2006) do not give any specific reasons but exclude stock options from their sample as well. Other studies retain the sale of the shares in their sample when stock options are exercised and the acquired shares are sold immediately.⁶

Nonetheless, a new strand of literature has emerged that specifically focuses on the ex- ercise of stock options by corporate insiders. Carpenter and Remmers (2001) pioneer in this field with their research on inside information related to the decisions by corporate insiders to exercise their stock options. However, they cannot find significant capital markets’ reactions to these exercise decisions. Huddart and Lang (2002) investigate non-executive employees’ exercise decisions and find that they include price-relevant information. Kyriacou and Mase (2003) examine stock option exercises by insiders in the UK and report that corporate insiders do benefit from private information when ex- ercising stock options. Bartov and Mohanram (2004) study top-level executives’ exer- cise decisions of stock options and conclude that abnormally large option exercises pre- dict the future performance of a company’s stock. Burns and Kedia (2006) concentrate on the correlation of a CEO’s stock option portfolio’s sensitivity to stock price change with aggressive accounting practices that lead to misreporting. Two recent studies (Brooks et al. (2006) and Veenman et al. (2007)) explicitly discuss abnormal returns in the aftermath of stock option exercises by corporate insiders and find that they yield significant negative long-term returns.

All but one of the above mentioned studies analyzing insiders’ stock option exercises concentrate on the United States. The US capital markets play, just by their sheer size, a very significant role for the world economy. Understanding the American capital mar- kets is therefore of primary interest to the academia and the majority of capital markets’ research focuses on the United States. Moreover, new research questions are usually phrased and examined in academic circles at American universities and research institu- tions before similar studies will be carried out in other countries. As a result, to the knowledge of the author, the effects of stock option exercises by corporate insiders have not yet been investigated in Germany.

This study examines whether German capital markets show any reaction to stock option exercises by corporate insiders. Germany has a relatively new insider trading regula- tion.⁷ Insiders were not obligated to report all of their trades until as recently as July 2002. Thus, almost all studies on insider trading in Germany focus on the time after July 1, 2002. Dymke and Walter (2007) analyze whether corporate insiders take advantage of inside information trading in their companies’ stocks in a period form July 1, 2002 to April 30, 2005. They specifically exclude the analysis of stock options. My study uses almost the same data sample and can therefore be seen as an extension of their paper. Since the exercise of stock options makes up only a very small fraction of all insider transactions, the investigation period is mildly extended to the end of 2005 in order to analyze a larger sample of corporate insiders’ stock option exercises.

The objective of this thesis is twofold: First, this study presents the findings of academic research on insider trading in common stock, conducted over the last decades and in different countries. The thesis will also introduce the newer strand of academic research that focuses on executive stock option exercises and whether corporate insiders’ exer- cises reveal new information to the markets, and finally link the academic research to the German capital markets. Second, the major contribution of this study to the litera- ture can be seen in the analysis of three and a half years of stock option exercises by corporate insiders in Germany.⁸ The question whether their exercise transactions are followed (or preceded) by abnormal returns has not been addressed so far. Using current event-study methodology, the short-term effects on the German capital markets will be measured by cumulative abnormal returns (CARs) for different time windows around the event day. While the exercise of stock options by corporate insiders does not offi- cially become publicly available before they are reported to the German Federal Finan- cial Supervisory Authority (‘Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin’), the information might, nevertheless, leak to the capital markets before the reporting day. Therefore, not only the day on which the transaction is reported but also the actual transaction day will be set as an event day.

The results of this study will be briefly linked to and compared with the results of aca- demic research in other countries. At the end, I give an answer to the question that has already been phrased in the thesis’ title: “Do German Capital Markets React when Cor- porate Insiders Exercise Stock Options?”

2. On Insider Trading

2.1 Review of the Literaure on Insider Trading

2.1.1 Evidence from the United States

Insider trading attracts the attention of the academia, regulators, and the public today as it has in the past. The reason for this interest is easily understandable as corporate insid- ers are believed to have a privileged and monopolistic⁹ access to information regarding their companies. Since they could (mis-)use their information to trade profitably on the capital markets, regulators have tried to prevent them from exploiting their informa- tional advantage. As a reaction to the Wall Street Crash of 1929, which is often believed to have caused the Great Depression, the US Congress enacted a number of laws to regulate the financial markets in the United States. The Security and Exchange Com- mission (SEC) has imposed bans on insider trading in the US as early as 1934 by the passing of the Securities Exchange Act.

Thus, the United States have been in the vanguard of insider trading regulation and, consequently, the academia began to investigate effects of insider trading in the US. The definition of corporate insiders in the United States is addressed by SEC regulation. According to the Securities Exchange Act insiders are defined as officers, directors, and shareholders that hold more than 10% of the equity.¹⁰ They have to report the trades in their own companies’ securities to the SEC “by the 10th day of the month following the month of the change in the holdings”.¹¹ Moreover, Section 16 (b) requires corporate insiders to pay their companies any profit obtained by trading in their companies shares if the shares were held for less than 6 months. Last but not least, the disclose or refrain rule reflects the SEC’s volition to guarantee the fairness of capital markets to outside investors. This rule states that a corporate insider must either disclose all material in- formation or refrain from trading until the information becomes public knowledge.¹² The effectiveness of insider trading regulation has been discussed in a number of publications. However, since the effectiveness of insider trading regulation is not the focus of this study, it is not addressed here.¹³

Due to the high scrutiny that insiders have experienced, it is not surprising that aca- demic research has started to address the issue of insider trading more than 30 years ago. Especially after Fama (1970) defined three possible states for financial markets¹⁴, academics have looked increasingly at insider trading in order to test the different effi- cient market hypotheses.

One of the early studies on insider trading was conducted by Jaffe (1974). Using monthly trading data for 200 large companies in the 1962-1968 period and testing the information content of the Official Summary of Insider Trading (a monthly report, pub- lished by the SEC), Jaffe (1974) finds that corporate insiders trade successfully in their companies’ stocks.¹⁵ However, he also points out that, if transaction costs are taken into account, only a small number of trading samples do generate profits. He concludes that his results are inconsistent with the strong-form market efficiency as defined by Fama (1970). Jaffe (1974) assumes opportunistic behavior by corporate insiders when he re- marks: “[…] insiders may purposely trade without information to camouflage trading based on special information”.¹⁶ However, he also highlights that transactions by insid- ers do not necessarily have to be carried out in order to benefit from private information. Two years later, Finnerty (1976) tries to evaluate the performance of the typical insider. In contrast to Jaffe’s (1974) approach, he forms insider buy- and sell-portfolios and compares their performance to the market performance.¹⁷ He also discovers above- average returns for the insiders’ portfolios in the years from 1969 to 1971 and, there- fore, concludes that insiders can outperform the market. Hence, he also contests that the strong form of the efficient market hypothesis is valid in the analyzed time frame.¹⁸

As Jaffe (1974) and Finnerty (1976) find some evidence that corporate insiders can profit from their access to information by trading in their companies’ securities, Seyhun (1986) further investigates these findings which are inconsistent with the efficient market hypothesis. His paper can be considered as a milestone for the research in the next 20 years. It is quoted in almost every study on insider trading thereafter. Seyhun (1986) emphasizes that not only uninformed traders might lose against informed traders but the market-maker would lose as well, which leads to an adverse selection problem.¹⁹ As the market-maker would systematically lose to informed investors, this would even- tually force him to raise the bid-ask spread which would especially harm regular (unin- formed) investors while informed investors would continue to trade if they expected stocks to rise above the ask price. Seyhun (1986) points out that the bid-ask spread has to be beard in mind when looking at possibly profitable mimicking strategies of corpo- rate insiders. If the bid-ask spreads were ignored, he argues, the realizable profits for outside investors would be overstated. Seyhun (1986) takes the last day on which insid- ers trade each month as the event day and discovers abnormal positive price reactions after insider purchases and abnormal negative price reactions after they sell.²⁰ He states, however, that the abnormal profits realized by corporate insiders do not seem to be es- pecially large as they become negative or close to zero if transaction costs are taken into account. This result is consistent with the efficient market hypothesis.²¹ Additionally, Seyhun (1986) phrases the information hierarchy hypothesis, which states that “insiders who are more familiar with the overall operations of the firm trade on more valuable information”.²² This hypothesis has often been tested thereafter, with mixed empirical results.²³ However, Lin and Howe’s (1990) findings actually support the information hierarchy hypothesis for the period from 1975 to 1983 on the over-the-counter (OTC) market. They also agree with Seyhun (1986) that high transaction costs, especially the bid-ask spread, basically eliminate the potential for positive abnormal returns.²⁴

Rozeff and Zaman (1988) test the insider trading anomaly²⁵ and conclude that, while the results still reject the strong-form market efficiency in a statistical sense, outsider profits evaporate after transactions costs.²⁶ They also highlight that insiders are not professionals in valuation and security analysis and must therefore accept opportunity costs if they want to benefit from trading in their companies’ stocks.²⁷ While they al- ready adjust their findings for size and earnings/price (E/P)-effects in their early paper, Rozeff and Zaman (1998) analyze the effects of cash flow per share to price per share (CF/P) and book value to price (BV/P).²⁸ They conclude that, on the one hand, outsiders seem to overvalue growth stocks and undervalue value stock and that, on the other hand, insider transactions resemble a well-informed contrarian approach to stock investing.²⁹

Another seminal and extensive examination of insider trading activities is provided by the study of Lakonishok and Lee (2001) that covers insider transactions at the New York Stock Exchange (NYSE), at the American Stock Exchange (AMEX) and at NASDAQ during the 1975-1995 period. They find no major stock price adjustments around either the transaction or reporting dates of insider trading.³⁰ Lakonishok and Lee (2001) stress the point that some sales of companies’ stocks by insiders might be trig- gered by the desire to diversify their portfolios rather than by inside information. More- over, consistent with other studies³¹, their results propose that managers in smaller firms possess more profitable information about their companies than do the managers of lar- ger firms.³² While they acknowledge that insiders especially benefit when trading in small companies, Lakonishok and Lee (2001) also clarify that mimicking strategies will not be very successful as trading in small stocks is rather expensive. Thus, they argue, insiders trade beneficially but investment strategies based on insider trading activity will, most likely, not result in any superior results.³³

While the studies mentioned above come to the conclusion that the insider trading anomaly does not hold valid net of transactions costs, Bettis et al. (1997) analyze a sample of large-volume trades by high-ranking insiders and their results show that out- siders can indeed benefit from mimicking reported trades by insiders.³⁴ Nevertheless, it should be noted that their methodology differs in many points from the previous (and following) literature. While most other event-studies use daily or monthly data to calculate returns, Bettis et al. (1997) use weekly data.³⁵ Moreover, they do not measure abnormal profits with cumulative abnormal returns (CARs) but with cumulative average size-adjusted prediction errors (CASPEs).³⁶ At last, they also assume shorter reporting delays than, e.g., Seyhun (1986) or Rozeff and Zaman (1988), which, they admit, are probably related to the different results of their research. Thus, it remains questionable if their findings can be generally compared to the ones from other studies.

In order to learn about the information content of different trade sizes, Barclay and Warner (1993) study them and argue that the most informative trades should be concen- trated in a medium-size category (that they define, somewhat arbitrarily, between 500 and 9,900 shares). They call this the stealth trading hypothesis and find it confirmed by an analysis of a sample of NYSE tender-offer targets.³⁷ Thus, they find proof for Kyle’s (1985) theoretical assumptions, which claim that informed investors might attempt to camouflage their trades in order to hide superior information that they possess.³⁸

The majority of the literature assumes that capital markets are informationally efficient and tests this hypothesis by examining whether this can hold true by looking at abnor- mal returns that follow insider trades. Leland (1992), on the other hand, raises a differ- ent research question. Despite the regulative ban on insider trading, he argues, inter alia, that stock prices would better reflect information if insider trading was allowed and that they would be higher on average. He also admits that outside ini will be hurt by insider trading.³⁹ Thus, Leland’s (1992) study does not advocate the lift of the insider trading ban but rather provides a different approach in the long history of research on insider trading.

While the major part of the literature focuses on abnormal profits right before or after the observed insider trading day, Ke et al. (2003) investigate stock sales by insiders be- fore a break in a string.⁴⁰ They detect that insiders increase their selling activity 2 years to 9 months before the break.⁴¹ Interestingly, Ke et al. (2003) find little evidence for a higher frequency of sales by corporate insiders in the two quarters that are preceding the proclamation of a break. They conclude that insiders trade a long time before the an- nouncement of a break in order to avoid losses but also steer clear of selling two quar- ters before the break as this might trigger adverse publicity and shareholder class-action suits.⁴²

While most of the other studies concentrate on the informativeness of insider trading for outside investors, Jeng et al. (2003) measure the returns earned by insiders themselves and compute the expected costs of trading by corporate insiders to outsiders. Setting the abnormal return that corporate insiders realize in proportion to their overall market frac- tion, they calculate that outsiders would not be willing to pay more than 10 cents per $10,000 sale to ensure that the transaction was not carried out with an insider.⁴³ Since this amount does not seem to be exceptionally large, they conclude that US regulators can be reassured that the current insider trading rule satisfactorily protects outside inves- tors when they trade stocks on the open market.⁴⁴

2.1.2 Evidence from Europe

Evidence from Europe, as another center of the world financial markets, has emerged later and the results of academic research have often been compared to empirical find- ings from the American financial markets. The definition of corporate insiders in Europe⁴⁵ is different than in the United States. In contrast to the SEC’s regulation, other key employees⁴⁶ and large shareholders are not included in the UK in the legal defini- tion of insiders. However, members of the board of directors (both executives and non- executives) are regarded as insiders in the UK as well. According to the 1985 Compa- nies Act, corporate insiders (often referred to as directors) have to notify their company no later than on the fifth business day after the insider transaction and the company has to announce this transaction then without delay to the London Stock Exchange (LSE). Moreover, there exist trading bans on the LSE that prohibit insiders to trade stocks of their own companies 2 months before final, preliminary, or interim earnings announce- ments and 1 month before quarterly earnings announcements.⁴⁷ The peculiarities of German financial regulation and evidence from insider trading studies in Germany will be addressed in chapter 2.2.

An early study on insider trading in the UK was conducted by King and Roell (1988). A large part of their publication discusses potential benefits but especially costs to the public when insider trading is not prohibited. However, after presenting evidence from the US, they also provide an investigation of deals by directors and chairmen in their own companies’ securities in the UK from January 1986 to August 1987.⁴⁸ After form- ing buy- and sell-portfolios, their findings suggest that insiders outperform the market; the buy group’s results are significantly different from zero at the 5% level.

Friederich et al. (2002) study abnormal returns around insiders’ trades on the LSE. They use higher frequency (i.e., daily) data in order to investigate short-run excess returns in smaller companies from 1986 to 1994.⁴⁹ As studies in the United States have found be- fore, “buy trades are followed on average by larger abnormal returns than sell trades, and ‘clustered’ trades strongly dominate large ones in terms of signal strength”.⁵⁰ Frie- derich et al. (2002) also find proof for the stealth trading hypothesis of Barclay and Warner (1993), i.e., medium-sized trades appear to contain more information than large trades. Most importantly, their final conclusion is consistent with most of the insider trading literature in the US: Net of transactions costs, the abnormal returns are close to zero, as one would expect it in an efficient market.⁵¹

A seminal study on insider trading for the UK is provided by Fidrmuc et al. (2006). They find that ownership structure is important when it comes to the markets’ reactions to insider trading, i.e., that it has an effect on the CARs of insiders’ transactions. If the companies seem to be seriously monitored by blockholders, the information value of insiders’ transactions is reduced, whereas the existence of large institutional investors (who might not monitor the directors’ trading activity as closely) strengthens the mar- kets’ positive reaction to purchases by insiders.⁵² Moreover, they argue, consistent with other studies (e.g., Lakonishok and Lee (2001) or Friederich et al. (2002)), that the posi- tive signal of a purchase of their own companies’ shares is much stronger than the nega- tive signal of a sale due to possible liquidity needs that might drive the insiders’ sale.⁵³

Fidrmuc et al. (2006) find significant positive CARs for large purchases on the day after the announcement day and argue that the transactions of UK directors seem to include more information as they trade less frequently compared to their US counterparts. They conclude that differences in regulation and reporting speed between the United States and the UK are responsible for higher CARs in the aftermath of insider transactions in the UK.⁵⁴ As other studies in the US (e.g., Jeng et al. (2003)), Fidrmuc et al. (2006) do not find any support for Seyhun’s (1986) information hierarchy hypothesis.

Although the Norwegian stock market on the Oslo Stock Exchange (OSE) is neither comparable in size nor in importance to the American or British capital markets, the study of Eckbo and Smith (1998) should still be mentioned due to the interesting results they report. They discover zero or negative abnormal performance by insiders for a pe- riod from 1985 through 1992.⁵⁵ Eckbo and Smith (1998) use a different methodology than most other papers on insider trading but even after performing a version of the event-study methodology for comparison purposes, their results do not change. “Over- all, the performance analysis rejects the hypothesis of positive abnormal performance by insiders.”⁵⁶

Especially in the last 5 to 10 years, studies have been carried out for other capital mar- kets which come to varying results. Since the regulation and other country-specific pe- culiarities sometimes largely differ from one another, it would be well beyond the scope of this thesis to present the results for each of the different markets as well.

2.2 The Case of Germany

2.2.1 The Rise of German Financial Regulation

Jackson (2005) finds that countries which are based on common law, such as the United States and the UK, seem to be more rigorous on financial regulations than civil law re- gimes (like Germany).⁵⁷ Financial regulation is usually associated with positive public benefits in well-developed economies. There, policy-makers and regulators want to en- sure fairness, credibility, and effectiveness of the capital markets. Therefore, it is in particular surprising that large differences in financial regulation can be observed be- tween the prosperous countries of the West.

While Germany offered relatively little protection to shareholders until the 1990s, the regulative environment has changed fundamentally in the past years.⁵⁸ Surprising for such a large and affluent economy, Germany’s capital markets, especially when it comes to regulation, have been comparatively underdeveloped. Since the protection of creditors has traditionally been strong, the country’s capital markets have often been described as bank-dominated (e.g., Theissen (2004), Nowak (2004) and Betzer and The- issen (2005)). Theissen (2004) and Nowak (2004) report that by 2001, the market capi- talization as a percentage of the GDP, despite of having almost doubled in the previous 12 years, still lacked behind other developed markets (such as the UK and the US as the archetypes of market-dominated financial systems) and even the European average.⁵⁹

In the last few years, however, new financial regulations have come into effect that have altered the German capital markets significantly. Rather than quickly transforming into a US-style market-based system, Nowak (2004) states that the German capital markets gradually develop towards a market-oriented equity culture. In his survey on the Ger- man capital markets, he highlights that Germany did not have a proper capital market law until 1990 which is striking compared to, e.g., the United States where regulation of financial markets had been passed in the early 1930s.⁶⁰ After two laws and one ordi- nance were passed on capital markets’ regulation in 1990⁶¹, the Second Financial Mar- ket Promotion Act (‘Zweites Finanzmarktförderungsgesetz – FFG II’) of 1994 was con- sidered as the turning point in the history of financial regulation in Germany. “FFG II overhauled German financial law completely and established a regulatory apparatus comparable to that of the United States.”⁶² The act of a also created the Securities Trading Act (‘Wertpapierhandelsgesetz – WpHG’) which prohibits insider trading by law and is of crucial importance for this study.

[...]

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¹ Throughout this thesis, the terms ‘corporate insiders’ and ‘insiders’ will be used as synonyms.

² Regulations in the US are considered to be necessary to guarantee fair and honest markets by the Securi- ties Exchange Act of 1934, Section 2. The German Federal Financial Supervisory Authority BaFin (Bundesanstalt für Finanzdienstleistungsaufsicht) states on its website that the capital markets oversight division’s crucial role is to guarantee fair and transparent market conditions for investors.

³ To mention a few newspaper services: The Wall Street Journal regularly publishes the ‘Insider Spot- light’ for the US; the German financial newspaper Handelsblatt releases an ‘Insider barometer’ on its

website.

⁴ Jaffe (1974), p. 419.

⁵ Finnerty (1976), p. 1141-1142.

⁶ E.g., Betzer and Theissen (2005), p. 8, and Ke et al. (2003), p. 322.

⁷ A brief review of the German regulation will be presented in chapter 2.2.1.

⁸ Please note that all respective data sheets and calculations for both chapter 4 and chapter 5 can be found and reproduced on the annexed data CD. An Example for one particular table is presented in the appendix. The notation of the respective files should be self-explaining.

⁹ Rozeff and Zaman (1988), p. 26.

¹⁰ Section 16 of the Securities Exchange Act gives detailed information about the disclosure requirements of directors, officers, and principal stockholders. It can be accessed on: http://www.law.uc.edu/CCL/34Act/sec16.html (status as of September 4, 2007, 4.30pm).

¹¹ Bettis et al. (1998), p. 54.

¹² See, e.g., Bettis et al. (1998), p. 55.

¹³ For a discussion of the effectiveness of insider trading regulation, see, e.g., Padilla (2005), p. 17-26.

¹⁴ Strong form efficiency (where all public and private information is fully reflected in a security’s market price), semi-strong form efficiency (all publicly available information is reflected in a security’s market price), and weak form efficiency (only historical price information can explain a security’s market price), see Fama (1970), p. 383.

¹⁵ For further discussion of the results, see Jaffe (1974), p. 420-425.

¹⁶ Jaffe (1974), p. 414.

¹⁷ For further discussion of the methodology and the results, see Finnerty (1976), p. 1142-1146.

¹⁸ Finnerty (1976), p. 1148.

¹⁹ For a detailed discussion of the adverse-selection problem and the bid-ask spread, see Seyhun (1986), p. 190-192.

²⁰ For further discussion of the methodology, see Seyhun (1986) p. 193-196.

²¹ Seyhun (1986), p. 210.

²² Seyhun (1986), p. 202.

²³ E.g., Jeng et al. (2003) and Friederich et al. (2002) fail to find evidence for the information hierarchy hypothesis in the US and the UK, respectively.

²⁴ Lin and Howe (1990), p. 1283.

²⁵ The insider trading anomaly refers to the fact that outsiders can still realize abnormal profits by trading on publicly available insider trading data.

²⁶ See Rozeff and Zaman (1988) p. 39 and p. 43.

²⁷ Rozeff and Zaman (1988), p. 39.

²⁸ Rozeff and Zaman (1998), p. 703.

²⁹ Rozeff and Zaman (1998), p. 715.

³⁰ Lakonishok and Lee (2001), p. 82.

³¹ See, e.g., Seyhun (1986) and Seyhun (1998).

³² Lakonishok and Lee (2001), p. 94.

³³ Lakonishok and Lee (2001), p. 109.

³⁴ Bettis et al. (1997), p. 62.

³⁵ MacKinlay (1997) states in his paper about even-study methodology that daily and monthly intervals are the most common sampling intervals in event-studies (p. 34).

³⁶ For further discussion of the methodology, see Bettis et al. (1997), p. 59-60.

³⁷ Barclay and Warner (1993), p. 302.

³⁸ For further discussion of insiders camouflaging their transactions, see Kyle (1985), p. 1316-1320.

³⁹ Leland (1992), p. 862.

⁴⁰ A string is defined as consecutive increases in quarterly earnings relative to the previous year; a break refers to the end of a string, i.e., when earnings in the present quarter are lower than in the same quarter of the previous year (Ke et al. (2003), p. 316).

⁴¹ For further discussion of this and the following, see Ke et al. (2003), p. 338-342.

⁴² Ke et al. (2003), p. 343.

⁴³ Jeng et al. (2003), p. 460.

⁴⁴ Jeng et al. (2003), p. 468.

⁴⁵ Most research has been conducted for the UK markets as they resemble the US markets the most.

⁴⁶ E.g., company lawyers.

⁴⁷ For a more detailed discussion on regulation in the UK, see, e.g., King and Roell (1988), p. 182-185, Hillier and Marshall (1997), p. 3-4, or Fidrmuc et al. (2006), p. 2933-2937.

⁴⁸ For a detailed discussion of their findings for the UK, see King and Roell (1988), p. 177-179.

⁴⁹ Friederich et al. (2002), p. 9.

⁵⁰ Friederich et al. (2002), p. 9.

⁵¹ Friederich et al. (2002), p. 25.

⁵² Fidrmuc et al. (2006), p. 2932.

⁵³ Fidrmuc et al. (2006), p. 2938.

⁵⁴ Fidrmuc et al. (2006), p. 2953.

⁵⁵ Eckbo and Smith (1998), p. 468.

⁵⁶ Eckbo and Smith (1998), p. 496.

⁵⁷ For further discussion of this and the following, see Jackson (2005), p. 3-4.

⁵⁸ For a general discussion of this and the following, see, e.g., Nowak (2001), Nowak (2004), and Theis- sen (2004).

⁵⁹ Theissen (2004), p. 140 and Nowak (2004), p. 427.

⁶⁰ The Securities Act (that regulates the offer and sale of securities) was passed in 1933 and the Securities Exchange Act (that regulates the secondary trading of securities and created the SEC) in 1934.

⁶¹ The Prospectus Act (‘Verkaufsprospektgesetz’), the First Financial Market Promotion Act (‘Erstes Finanzmarktförderungsgesetz’), and the Sales Prospectus Ordinance (‘Verkaufsprospekt-Verordnung’).

⁶² Nowak (2004), p. 429.