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Are Directors' Dealings Informative?

Evidence from European Stock Markets

Kaspar Dardas* European Business School Andre Gttler European Business School

Abstract Are directors' dealings reports informative for outside investors? We analyze short-term announcement effects for 2,782 companies from eight European countries between 01/2003 and 12/2009. We find significant announcement effects in four out of eight countries after directors' dealings reports have been disclosed. For most countries the magnitude of the announcement effect depends on transaction size, firm size, book to market ratio, and multiple trades by different insiders on the same trading day. The results are stronger for purchases than for sales. For France, Ireland and Sweden we find tentative evidence that the corporate position of an insider is connected to the size of the announcement effect.
JEL classification: G14, G15

Keywords: Directors' dealings, Market Abuse Directive, Insider hierarchy, R&D intensity

Department of Finance, Accounting and Real Estate, EBS Business School, Gustav-Stresemann-Ring 3, 65189 Wiesbaden, Germany, E-mail: kaspar.dardas@students.ebs.edu, +49 173 305 8889 (Corresponding author). Department of Finance, Accounting and Real Estate, EBS Business School, Gustav-Stresemann-Ring 3, 65189 Wiesbaden, Germany, E-mail: andre.guettler@ebs.edu We thank an anonymous referee for very helpful comments. We also thank 2IQ Research for providing the data for our analysis. Any remaining errors are our own.

In the past decade, the use of directors dealings reports in stock analysis has become common practice among financial professionals. The rationale behind it is that substantial information asymmetries exist between company insiders and outside investors.1 Since insiders are involved in the day-to-day business of a company, they are expected to be better informed about the true value of their companys assets than any other investor. Thus, whenever insiders trade stocks of their company, they are assumed to be revealing new information. We investigate whether directors dealings reports are informative for outside investors. We analyze short-term announcement effects for 2,782 companies from eight European countries, namely Austria, France, Germany, Ireland, Italy, the Netherlands, Sweden, and the U.K, with an observation period between 01/2003 and 12/2009. Our main findings show that there are significant announcement effects in four out of eight countries after directors dealings reports have been disclosed. We find that the magnitude of the announcement effect is higher for purchases than for sales. We also conclude that the magnitude of the announcement effect depends heavily on transaction size. Factors such as firm size, book to market ratio, or multiple trading by different directors on the same day have an influence on announcement effects. For France, Ireland and Sweden we find tentative evidence that the corporate position of an insider is connected to the size of the announcement effect. Moreover, we show that in some countries the recently implemented Market Abuse Directive had a noticeable effect on the information content of directors' dealings. We further conclude that directors dealings reports lead to largest announcement effects in the healthcare and energy sectors. Previous studies based on directors dealings reports show that company insiders generate abnormal returns by trading stocks of their company (e.g. Seyhun (1986), Rozeff and Zaman (1988), Lin and Howe, (1990), Lakonishok and Lee (2001)). Others focus on the long-term abnormal returns generated by company insiders. For instance, Rozeff and Zaman (1988) examine whether outsiders are able to earn abnormal profits by mimicking insiders. Since the information on the insider trade takes some time to reach the market, they conduct the outsider performance test by imposing a two-month trading lag when creating the outsider portfolios. They find that outsiders are indeed able to generate

We use the terms insiders and directors interchangeably unless stated otherwise. Thus, we do not follow the strict U.K. definition of directors but rather refer to all company insiders whenever using the term directors.

abnormal returns. However, after including transaction costs, the outsider profits disappear entirely. In contrast, by using U.S. data Bettis, Vickrey, and Vickrey (1997) show that outsiders are able to make significant profits. They measure weekly abnormal returns by using large-volume insider trades as event triggers and find that outsiders are able to make statistically and economically significant abnormal returns net of transaction costs for holding periods that are longer than 13 weeks. Specifically, they report an abnormal return of 6% for a holding period of 26 weeks.2 More-recently published studies focus on the immediate effects of insider trading around announcement and/or trading days. Lakonishok and Lee (2001) examine a five-day period after the announcement as well as after the trading day for U.S. stocks. Only for trades by insiders of small capitalization firms do they detect an abnormal return of 0.93% subsequent to the trading day. Friedrich et al. (2002) examine short-term daily returns following the trading days of insiders for the U.K. They do not find evidence that outsiders are able to earn economically significant returns net of transaction costs. Previous research on directors dealings is mostly concentrated on the U.S. and U.K. This is obviously due to the long history of insider regulation in both countries. The existence of announcement effects is undisputed in both countries. However, research on directors dealings in continental Europe shows mixed results. Klinge et al. (2005), Stotz (2006), Dymke and Walter (2008), and Betzer and Theissen (2009) find significant abnormal returns based on directors dealings in Germany. On the other hand, Eckbo and Smith (1998) do not find any effects in the Norwegian stock market. Del Brio et al. (2002) find that insiders are able to earn abnormal returns in Spain. For the Italian market, Bajo et al. (2006) observe that abnormal market performance occurs after an insiders transaction, usually between the first and the third month after the insider trade. Zingg et al. (2007) find that outsiders who mimic small insider transactions can earn abnormal returns in the Swiss stock market. For the Netherlands, Degryse et al. (2009) find significantly positive abnormal returns after purchases by directors and supervisory board members.3 Recently, two studies examine insider dealings in a broad selection of countries. Fidrmuc et al. (2010) investigate the dependence of market

For long-term studies, which examine portfolios based on insider trades see Jeng et al. (2003) for the U.S. and Giamouridis et al. (2008) for the UK. 3 See also Kallunki et al. (2009), who investigate the motives of Swedish insiders to trade stocks of their firms.

price reaction to insider transactions and corporate governance in 16 countries. They find that market reaction to insider purchases is larger in countries with good corporate governance. Aussenegg and Ranzi (2008) examine the market reactions to directors dealings reports in seven European countries of German and French legal origin.4 They show that information asymmetries between insiders and outsiders are stronger in German law than in French law countries. In both of the above cross-country studies, the authors pool countries based on their legal origin and investigated market reactions of these pooled samples. This paper contributes in the following ways to the existing literature. First, with regard to other cross-country studies on legal insider trading we focus our analysis on single countries and not on pooled country samples. This study structure allows us to control for country-specific regulatory changes, which have been implemented during our observation period. Specifically, the E.U. Market Abuse which aims to harmonize financial markets across Europe. Thus for each country from our data sample, we give a short overview on the regulatory changes with respect to directors' dealings and test whether these changes had an effect on the information content of directors' dealings reports. Moreover, we want to show in which countries and under which conditions directors dealings reports are most informative. To give a clear answer as to whether directors dealings announcements are informative or not, we see the need to investigate each country individually. After all, outside investors purchase/sell stocks in single country exchanges and not according to factors such as the legal origin of a country. Our parallel structured cross-country analysis is also unique in its detailed examination of the insider hierarchy hypothesis, which states that the corporate position of an insider causes different announcement effects. This is aided by our data quality, which allows us to identify the insider position for each single transaction. To the best of our knowledge, the insider hierarchy hypothesis is unexplored for most of the countries in our study.5 Second, we put a strong emphasis on the comparability of results between each country in our analysis. A remarkable aspect of most European studies is that results are often compared to the results from benchmark studies of the U.K. or U.S. (e.g. Dymke and Walter (2008), Degryse et al. (2009)). Yet in the U.K. and U.S. papers, the
Aussenegg and Ranzi (2008) classify countries according to the legal origin as defined by La Porta et al. (1998). 5 The insider hierarch hypothesis has been previously examined for the U.K. by Fidrmuc et al. (2006) and for Germany by Dymke and Walter (2008) and Betzer and Theissen (2009).
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event studies are applied over substantially longer and different observation periods than in (Continental) European studies. The comparability of event-study results obtained from different observation periods is problematic because event studies are affected by time-varying idiosyncratic risk. The power and specification of event studies is consequently not stable through time. Therefore, a comparison of event study results from substantially different observation periods might lead to erroneous conclusions. For that reason, our paper analyses announcement effects for different markets with almost identical time periods, identically constructed benchmark indices, and analogous eventstudy variables. Third, due to the quality of our dataset we were able to use only pure buy and sell transactions, which allows an unbiased examination of announcement effects for each single country. For instance, we exclude transactions related to mergers and acquisitions and any other type of transaction that might distort a clear examination of the announcement effect.6 Finally, we examine which industry sectors show highest announcement returns to directors dealings reports in European stock markets, which is also novel to the literature.7 The rest of the paper is organized as follows. Section I gives a short overview of the directors dealings regulations in Europe. Section II derives our main hypotheses from previous literature. Section III describes our data and methodology. Section IV analyzes the results and Section V concludes the paper.

I.

European Regulation on Directors Dealings

In the U.S., the reporting duty of directors' dealings has a long tradition with legislation in place since 1934. The U.K. was the first country in Europe to implement insider trading laws. Its history of regulating directors dealings goes as far back as 1979, with the implementation of the 1977 Model Code. The 1985 Companies Act, enacted in 1985 extended this regulatory framework. It required the immediate reporting of insider transactions, no later than the fifth business day after an insider trade has been made. In addition, it had a narrow definition of who is considered a company insider. Only
Fidrmuc et al. (2006) investigate the impact of news releases prior to directors transactions for the U.K. market. They find that market reactions to insider trades are mostly influenced following the news of mergers and acquisitions. 7 Whenever we use the term insider trading we refer to legal insider trading unless stated otherwise. For a study on illegal insider trading (in credit derivatives markets) see Acharya and Johnson (2007).
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executive board members and non-executive directors were required to report their trades, whereas large shareholders were excluded from reporting. A remarkable characteristic of the U.K. regulation was and still is the existence of extensive blackout periods. In particular, the U.K. regulator requires a two-month trading gap prior to final and interim earnings announcements.8 Most other European countries did not implement directors dealings regulations before the 1990s.9 Moreover, all European countries regulated insider trading differently in terms of the definition of an insider and inside information. The implementation of the Council Directive 89/592/EEC in 1992 brought a change to these inconsistent regulations.10 This was the first adoption of a directive by the European Parliament to control for insider trading across all European capital markets. Nevertheless, this directive gave each member state a wide range of freedom concerning the implementation and enforcement of insider trading laws. In 2004, the more comprehensive Market Abuse Directive 2003/6/EC (2004/72/EC) replaced it.11 The Market Abuse Directive, which is currently valid for all European Union states, requires all members to establish minimum standards for regulating insider trading. The member states must ensure that directors dealings reports are made within five business days and contain crucial information such as size, price, and the characteristic of the transaction. The directive also defines the people who are obliged to report transactions. In particular, all persons in managerial positions, as well as their families and institutions that are associated with these persons, are required to report their transactions.12 Furthermore, the E.U. directive requires companies to report the names of all insiders by the issuers and to update this information regularly. All member states can implement a 5,000-euro notification barrier. Thus, small transactions only have to be reported if the accumulated transaction size exceeds 5,000 euros in a calendar year. In 2007 another directive which aims to improve reporting standards and harmonize

For a detailed overview of insider trading regulations in the U.K., see Pope et al. (1990) and Fidrmuc et al. (2006). 9 See also Gersbach and Nedwed (1991) who present arguments for and against regulations on insider trading. 10 The release date of 89/592/EEC is 13/11/1989; the effective date is 01/06/1992. 11 The Commission Directive 2004/72/EC is an extension of the Market Abuse Directive 2003/6/EC. It gives detailed requirements on directors dealings reporting standards. 12 According to 2004/72/EC, art. 1(1), a person discharging managerial responsibilities within an issuer shall mean a person who is (a) a member of the administrative, management or supervisory bodies of the issuer; (b) a senior executive, who is not a member of the bodies as referred to in point (a), having regular access to inside information relating, directly or indirectly, to the issuer, and the power to make managerial decisions affecting the future developments and business prospects of this issuer.

financial reporting within the E.U. was implemented. This so-called Transparency Directive 2004/109/EG (2007/14/EG) requires each member state to ensure that there is at least one officially appointed mechanism for the central storage of regulated information. Moreover, it states that issuers must ensure appropriate transparency for investors through a regular flow of publicly available information and that corporate fillings have to be reported electronically with an easy access by end users. The Transparency Directive mainly focuses on shareholding disclosures and periodical financial reports, however, it also implies an increased demand for reporting standards on directors' dealings. Table I documents the official implementation dates of the Market Abuse Directive 2003/6/EC as well as the Transparency Directive 2004/109/EG in each country from our data sample. It is noteworthy that for some countries the Market Abuse Directive had a strong impact on the legal framework with regard to directors dealings whilst for others it had almost none. For the U.K. and Ireland, for instance the directives brought only relatively small changes regarding the regulations on directors' dealings because both countries had well-established regulatory frameworks beforehand. However, for countries such as Austria, Germany and France the Market Abuse Directive changed the regulations on directors' dealings fundamentally and improved the reporting standards significantly (see Table I).13

II.

Hypothesis Development

Our approach is to examine the short-term abnormal returns within a five-day period subsequent to the announcement of an insider transaction. We expect share prices to adjust within several days after the buying/selling signals have been given to the market. If insiders are indeed able to identify whether their company is over-/undervalued and if insiders give clear signals to the market by buying or selling stocks of their company, then investors should react quickly. Therefore, we examine the following hypotheses.

Hypothesis 1: The announcement of purchases (sales) by insiders leads to immediate positive (negative) abnormal returns in the underlying share.
See Mazars (2010), the European Commission web page on the Market Abuse Directive: http://ec.europa.eu/internal_market/securities/abuse/index_en.htm, European Commission web page on the Transparency Directive:http://ec.europa.eu/internal_market/securities/transparency/index_en.htm.
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Fidrmuc et al. (2006) report higher abnormal returns for large transactions than for small transactions in the U.K. Betzer and Theissen (2009) obtain similar results for the German market.14 Following these findings, we assume that announcements of large transactions give stronger signals to the market than announcements of small transactions.

Hypothesis 2: The announcement of large purchases (sales) by insiders leads to larger positive (negative) abnormal returns than the announcement of small purchases.

We proceed by examining the relation between an insiders position in the company and the size of the announcement effect. It is rational to assume that top-level executives should have an advantage over low-level executives in obtaining relevant information about changes in the firms value. Market reactions should be stronger following the announcement of trades made by high-level executives than by low-level executives. However, Fidrmuc et al. (2006) show that abnormal returns following the announcements of top-level executives in the U.K. are significantly lower than following the announcements of other directors.15 Dymke and Walter (2008) obtain similar results for the German market. These, on first sight, counterintuitive results might be explained by the fact that top-level executives are followed more closely by regulatory authorities and therefore trade at less informative moments. To see whether this is also the case for the countries in our data set we test each country for the so-called insider hierarchy hypothesis.

Hypothesis 3: The announcement of trades by top-level executives will result in stronger reactions in the market than the announcement of trades by other directors.

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Fidrmuc et al. (2006) as well as Betzer and Theissen (2009) define large trades when the trading volume exceeds 0.1% of the volume of shares outstanding. 15 See also Jeng et al. (2003).

In addition, we assume that multiple purchases (sales) by several insiders on the same day will give a stronger signal to the market than a single transaction by one insider. We believe that the announcement effect increases with the number of insider transactions.

Hypothesis 4: The announcement of multiple purchases (sales) by different insiders on the same day leads to larger positive (negative) abnormal returns than the announcement of single purchases.

Previous studies have shown that firm size in terms of market capitalization has a substantial influence on the announcement effect. Lakonishok and Lee (2001) conclude that directors dealing announcements for small capitalization firms show a significantly larger market reaction than in the case of large firms. Aussenegg and Ranzi (2008) also find a reverse relationship between abnormal returns after trade announcements and firm size for several European countries. Since analysts follow small firms less closely than they follow large firms, the information asymmetry is larger for small firms. Therefore, the possible new information that a directors dealings report contains about a small firm is more significant than in the case of a large firm. We assume the same for our data and therefore we state the hypothesis:

Hypothesis 5: The announcement of insider purchases (sales) in small firms leads to larger positive (negative) abnormal returns than the announcement of insider purchases in large firms.

A final investigation concentrates on industry sectors. For the U.S., Aboody and Lev (2000) showed that insiders gain higher returns in R&D-intensive firms than in firms with less R&D. The rationale behind it is that information asymmetries are higher in R&D-intensive firms due to the uncertainty of the outcome of R&D projects. This lets us assume that insiders might gain higher returns in R&D-intensive sectors such as healthcare and IT compared to sectors that are less R&Dintensive, such as consumer goods.

Hypothesis 6: The announcement of insider purchases (sales) in R&D-intense sectors leads to larger positive (negative) abnormal returns than the announcement of insider purchases (sales) in sectors with a low R&D intensity.

III.
A. Data Sources

Data Sources, Descriptive Statistics, and Methodology

Our data on directors dealing reports come from 2iQ Research, a data vendor that specializes in European insider trading. Whereas the source data is downloaded from stock exchange internet pages, adhoc news portals or directly from company websites and enhanced with qualitative research, which we will describe below. The original database contains a total of 151,989 insider transactions in exchange-listed companies from Austria, France, Germany, Ireland, Italy, the Netherlands, Sweden, and the U.K. We chose (with a few exceptions) the same observation period for each country, beginning on January 1, 2003 and ending on December 31, 2009. This allows us to examine the most extensive data sample, which includes all countries. Each transaction includes information on company name, insider name, insider position, trade date, trade size, announcement date, transaction type (11 different types), and security type (10 different types). In addition, some transaction types are marked with 14 characteristics that further specify each transaction. These characteristics identify whether a buy/sell transaction is option/award/plan related, merger related, tax liability related, capital increase related, a dividend reinvestment, a private placement, or remuneration. For instance, a sell transaction might be marked as tax related, which leads to an exclusion of this transaction from our study. Each single transaction has been researched for relevant company news around the transaction day and marked accordingly. This unique data quality allows us to filter only pure buy and sell transactions for each single country. In particular, Fidrmuc et al. (2006) point out the importance of controlling for merger related transactions, since these transactions decrease the announcement effect almost to zero. The most common transaction types in the original dataset (before filter rules are applied) can be categorized as buys (55.93% of all transactions), sales (33.91%), exercises (5.95%) and subscriptions (1.87%). We applied strict rules to modify this initial dataset. First, we dropped planned, 9

private, dividend related, merger related, tax related, neutral, and compensation transactions. This rule mainly eliminated transactions such as exercises, subscriptions, dividend reinvestments, or exercise related sales. Second, we dropped security types such as ADRs, bonds, options, and stock swaps and kept only ordinary shares. Furthermore, we dropped all transactions that are not in the currency of the respective domestic exchange. These filters decreased the sample to 72.46% of the original observations to 110,128 transactions. Moreover, we dropped all observations where the transaction price deviated by more than 20% from the securities closing price on that day. This rule further minimizes the likelihood that private or compensation-based transactions are included in the sample. Furthermore, we dropped all issuer-based transactions and transactions that were reported 20 calendar days past the transaction date, since we believe that these directors dealing reports attract only minimal attention in the markets.16 These rules decreased the data sample to 58.64% of the original observations (89,125 transactions). We also excluded transactions made by investment firms as well as funds, unless they are controlled by an insider and aggregate multiple transactions by the same insider on the same day. Based on this aggregation we define the total traded volume of an insider as a net purchase or sale. To avoid unnecessary noise we excluded transactions with an aggregated trade volume of less than 1,000 euros. This reduced the dataset to the final sample number of 44,907 observed transactions, which represents 29.52% of the initial sample. Table II gives a detailed overview of this final data set. Daily share returns, book values, and shares outstanding are obtained from Compustat. We also use the Compustat database to track any changes in company names. For each country we use the country-specific (Gross) MSCI Barra Performance Share Indices to calculate risk-adjusted returns.17 All transactions are converted into euros for non-euro countries using the daily exchange rate of the announcement date from Compustat.

Before the implementation of the Market Abuse Directive 2003/6/EC, most European countries did not have any requirements for timely reporting of directors dealings (see also Table I). Even after the implementation of the directive, some transactions are not reported within the required five business day range. Therefore, for about 5% of the transactions described above, the difference between reporting and transaction day is longer than 20 calendar days. 17 Gross refers to the maximum possible dividend reinvestment. The amount reinvested is the entire dividend distributed to individuals resident in the country of the company, but does not include tax credits.

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B. Descriptive Statistics Table III shows the descriptive statistics for our initial data sample, which includes net purchases, sales, option related sales, and exercises. Similar to Lakonishok and Lee (2001) and Fidrmuc et al. (2006), we calculate the (relative) trading frequencies per firm and year for each country.18 Directors in Germany, Ireland, and the U.K. have the lowest average trading frequency of all countries. On the other hand, Italy, the Netherlands, and Sweden seem to have extremely active insider trading. The biggest difference in (relative) insider trading frequency is between Germany (average 3.60 trades per firm and year) and Italy (average 8.54 trades per firm and year). There are several possible reasons why the average trade numbers vary between countries. First, there is a technical issue concerning how insider trades are reported in certain countries. Sweden and the Netherlands have a detailed accounting style of reporting insider transactions, which artificially inflates the number of transactions. In the Netherlands, for instance, an option exercise followed by the sale of the underlying shares is reported as three transactions in separated reports: the exercise of options, the subsequent purchase of the underlying shares, and the sale of these shares. In Germany, the U.K., and Ireland, such transactions are mostly reported as single sell transactions with a short note in the report that states that the transaction is option related. Second, the legal definitions of insiders vary across countries, resulting in different numbers of people acting as insiders. Countries that have a wide definition of insiders will consequently have more persons acting as insiders and thus have a higher number of insider trades. Italy, for instance, has the broadest definition of insiders among all European countries. This becomes evident when considering that all public officials in Italy are defined as insiders whenever their responsibilities allow them to obtain inside information. This is even the case when the officials do not have a specific relationship to a company. A counterexample of a country with a narrow insider definition is Ireland, where a specific relationship between a public official and a company must exist for the public official to be considered an insider. Furthermore, the Italian legislation does not differentiate between the
The (relative) trading frequencies for the UK, reported in Table III are consistent with the trade frequencies reported by Fidrmuc et al. (2006).
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penalties for primary and secondary insiders, which further indicates the wide definition of relevant insiders (Alexander (2007)).19 Third, the ownership structure of a country might have some relevance for the trading frequency of insiders. A country with an ownership structure that includes many publicly traded firms controlled by the state, families, or other financial firms will consequently have a large circle of people who are defined as insiders.20 On the other hand, countries with ownership structures that mostly consist of widely held firms must have fewer insiders per firm and therefore less insider trading. According to Faccio and Lang (2002), the highest proportion of widely held firms in Europe is in the U.K. (63.08%) and Ireland (62.32%). Both countries also show the lowest average insider-trade numbers in Table III. Finally, the trading methods carried out by some insiders explain the variation in trading frequencies. This is especially true for Italy, where it can be observed that insiders tend to buy stocks in several tranches within consecutive days. On the other hand, in Germany or the U.K. insiders place their positions in single transactions on a single day. We further examine all transactions in our sample categorized by insider position. Table IV shows the respective descriptive statistics, in which transactions are sorted into three classes according to the corporate position of the insider who performed the transaction. We grouped corporate positions into insider classes based on two criteria: the day-to-day business involvement of an insider and the ability of an insider to make strategic decisions in the company. Insider class A: CEO, Deputy CEO, CFO, COO, President, chairman (also non-executive), and similar corporate positions as well as respective family members. Insider class B: Divisional/regional CEO, CEO of subsidiary, Vice President, non-executive vice-chairman, Chief Information Officer, Chief Scientific Officer, Officer, managing
Primary insiders are defined as persons who obtain inside information because they are employees, large shareholders, or the above-mentioned public officials. Secondary insiders are any persons having inside information. For instance, a waitress who overhears a non-public conversation between two directors is already defined as a secondary insider. It must be noted that the legal definition of insiders falls into the discussion on illegal insider trading. However, we believe that a wide definition of insiders such as in Italy will have two consequences. On the one hand, the reported number of trades per firm and year will be higher than in a country that has a narrow definition of insiders. On the other hand, we assume that the information content of directors dealings reports will be lower in countries with a wide insider definition since less informed insiders will report transactions with low relevance to the market. 20 Directive 2003/6/EC, art. 2 (1) (b) defines all persons who are large shareholders as insiders. Therefore, not only persons who have a direct relationship with the company are considered as insiders but all executives of related companies as well. It is important to note that persons must be understood as natural persons as well as legal entities.
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director, executive director, company secretary, group director, upper management, and similar corporate positions as well as respective family members. Insider class C: Non-executive board member, (non-executive) director, supervisory board member, board of auditors, lower class executive (sales director, technical manager etc.), upper management of subsidiaries, former CEO/executive/board member, divisional/regional director and similar corporate positions as well as respective family members.

Panel A of Table IV shows the statistics for all transactions, while Panel B refers to large transactions. Similar to Betzer and Theissen (2009) and Fidrmuc et al. (2006), we define large transactions as all net purchases and sales that represent at least 0.1% of shares outstanding.21 According to Panel A, more purchases (30,878) were made by insiders than sales (14,029). Panel B reports the same with 4,576 purchases versus 4,107 sales. However, in both panels the average mean and median for sales is significantly larger than for purchases. These results are consistent with previous studies (e.g. Betzer and Theissen (2009) and Fidrmuc et al. (2006)). The explanation for the disparity between sales and purchase volumes is that insider sales are often liquidations of large remuneration packages. Purchase transactions, however, are private investments made by the insider, which are only fractions of these remunerations packages. According to Panel B, most active insiders are top executives with 2,373 (1,701) purchases (sales). Panel A reports the same for purchases (12,677); however, for sales all insider classes have about the same trading volumes.

C. Methodology We conduct our study by separately analyzing short-term announcement effects in each single country. To assess the information content of insider trade announcements we examine the cumulative average abnormal returns (CAARs) of the announcement day and the subsequent day CAAR(0;1) as well as longer event windows, CAAR(0;4), CAAR(0;20), and CAAR(-20;-1).

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A threshold relative to a firms market capitalization has an obvious bias towards small-cap firms since spending on the firms own shares will not rise evenly with the market capitalization of the firm. Nevertheless, due to cross-country income inequalities and differences in spending we regard a relative threshold as being superior over an absolute threshold.

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To calculate the CAARs and test for their significance, we apply a standard event study approach (MacKinlay (1997)). We define the event date as the announcement date of the transaction and proxy the market return by the corresponding (Gross) MSCI Barra Performance Share Index for each country. The beta is estimated over a period of 200 to 21 trading days prior to the announcement day. We employ a 41-day event window centered on the announcement day. Similar to Fidrmuc et al. (2006), we use three parametric and one non-parametric test statistics to examine whether CAARs are different from zero. In particular, we apply the test statistics tCAAR based on Barber and Lyon (1997), which is Student-t distributed with N-1 degrees of freedom. J1 and J2, based on Campbell et al. (1997). The choice between J1 and J2 depends on the variance of the securities with higher abnormal returns. J1 is preferred whenever large abnormal returns occur in securities with high variance. J2 is preferred whenever abnormal returns are constant across securities. Finally, we apply a non-parametric test statistic trank based on Corrado (1989). The non-parametric test statistic as proposed by Corrado (1989) has several advantages over parametric tests. For instance, it does not require normally distributed abnormal returns. Furthermore, it is robust in the presence of event clustering or event-induced increases in variance. We use a conservative approach to test the statistical significance of our results and therefore report only the lowest absolute value of the t-statistics described above. Moreover, we apply three other robustness checks to confirm our results and to control for possible thin trading problems in small capitalization stocks. First, we repeat our study by using market-adjusted returns with the respective (Gross) MSCI Barra Performance Share Index as the benchmark index. Second, for France, Germany, Sweden and the U.K. we also calculate CAARs with different all share indices. Specifically, the SBF250 for France, the CDAX for Germany, the OMX Stockholm for Sweden and the FTSE all share index for the U.K. Third, we calculate CAARs from a modified data sample that is free of event window clustering.22 In none of the modified samples

MacKinlay (1997) points out the importance of using non-overlapping event windows to calculate the aggregated cumulative abnormal returns. If event windows overlap, single securities will be correlated, which affects the variance of the aggregated cumulative returns. However, if event windows do not overlap the covariance between securities will be zero and the variance of aggregated cumulative returns can be calculated without any concern about the correlation of securities. The presence of event window clustering might lead to erroneous results in parametric tests.

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described above could we find remarkable differences to our initial results, which are presented in the following section.23

IV.
A. Cross-Country Analysis

Results

Table V presents the results for each single country from our dataset for all (Panel A) and large transactions (Panel B). Similar to Fidrmuc et al. (2006), we concentrate our basic univariate event study analysis on large transactions. In general, the abnormal returns for large transactions and all transactions are similar but larger in magnitude for large transactions. For large purchases reported in Panel B of Table V, we find that CAARs(0;1) are positive and significantly different from zero in five countries. Furthermore, we found significantly positive results for CAARs(0;4) in all countries besides Austria and the Netherlands. As expected, for most countries the main price adjustments occur within one trading week. After the fifth trading day the CAARs continue to rise, however, at a lower rate. The highest CAARs(0;1) are reported for Ireland (5.03%) and the U.K. (6.12%). However, the results for Ireland have to be regarded with caution since the observation number for large purchases (sales) is as small as 35 (21). For Sweden (1.27%) and Germany (1.11%), the CAARs(0;1) are significantly lower than for the U.K. and Ireland. The lowest significantly positive CAAR(0;1) is reported for Italy (0.49%). For CAARs(0;4), we observe increases relative to CAARs(0;1) in each country except for Ireland. For large sell transactions we observe significantly negative results for CAARs(0;1) and CAARs(0;4) only in the U.K. (-0.41% and -0.88%) and Sweden (-0.82% and -1.39%). The above results indicate clear market reactions following the announcements of insider trades. As hypothesized, we observe positive abnormal returns after purchase announcements and negative abnormal returns after sell announcements. Especially for Germany, Ireland, Sweden, and the U.K. we found significant results. Due to the magnitude of these CAARs, we see our results not only as statistically but also as economically significant. For large transactions, we found higher CAARs than for small transactions. Thus, we conclude that transaction size indeed plays a crucial role in the size of

We construct the data sample that is free of event window clustering by eliminating overlapping event windows for single securities. The results are omitted from the paper but are available upon request.

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the announcement effects.24 Especially for the U.K, the significance of trade size seems to be essential, since the difference between large transaction and all transaction CAARs is 4.28% for CAARs(0;1) and 4.73% for CAARs(0;4). We assume that the results for the U.K. and Ireland are strikingly high because investing based on directors dealings reports is more popular in these countries than in Continental Europe and thus leads to herd-like market reactions after announcements. Furthermore, our results for the U.K. reported in Panel B of Table V are higher compared to Fidrmuc et al. (2006), who report 3.12% for CAAR(0;1) and 4.62% for CAAR(0;4). We explain these differences with our more recent dataset and the increasing popularity of investing based on directors dealings reports.25 In addition, we see the exclusion of all types of remuneration, private, and merger related transactions as a reason for our high CAARs. We found the weakest evidence of announcement effects in countries with French legal origin. However, Austria, which is a German legal origin country, does not show any announcement effects, which might be due to the relatively small Austrian capital market. Another notable observation in Table V are the results for the pre-event CAARs(-20;-1), which are generally negative (positive) prior to purchase (sell) announcements for all countries except for Austria, Ireland, and the Netherlands. These results demonstrate that insiders tend to make purchase (sell) transactions after the share price has declined (increased). Thus, our univariate results confirm the general opinion from previous research that insiders follow a contrarian investment style (Seyhun (1992), Lakonishok and Lee (2001), Friedrich et al. (2002), Piotroski and Roulstone (2005)).

B. Transaction Size Hypothesis 2 states that large insider transactions trigger stronger announcement effects than smaller transactions. Our univariate result also indicates that large transactions are followed by larger announcement effects. However, previous literature also suggests that medium-sized trades are more informative than large trades since insiders tend to make smaller transactions, simply not to attract the attention of other market participants.26 Moreover, trades which are very large might lead to a

We further investigate the connection between announcement effects and transaction size in the following section. 25 Fidrmuc et al. (2006) examined directors dealings for the U.K. between 1991 and 1998. 26 Barclay and Warner (1993) also show that in an anonymous market informed insiders tend to hide behind medium-sized trades rather than trading large block transactions. Barclay and Warner (1993) refer to this trading

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substantial decrease in a company's free float and therefore be of minimal interest to other market participants.27 For the U.K., Friedrich et al. (2002) show that medium-sized trades predict higher returns than large ones. Therefore, we also calculate CAARs(0;1) and CAARs(0;4) for different transaction sizes and examine whether medium-sized transactions generate the highest returns. Specifically, for each country we calculate CAARs for the following net transaction size groups: (i) transaction size < 25,000 euros, (ii) 25,000 euros transaction size < 100,000 euros, (iii) 100,000 euros transaction size < 250,000 euros, (iv) 250,000 euros transaction size < 1,000,000 euros, and (v) 1,000,000 euros transaction size. We also perform a multivariate regression to test for differences between the size groups. In none of the observed countries do we find a clear indication that medium-sized trades generate higher abnormal returns than large ones. For reasons of brevity we do not present these results.28 Generally, we conclude that (short-term) CAARs rise with the size of the transaction. Similar to Fidrmuc et al. (2006), we find the highest CAARs whenever the trade size surmounts 0.1% of the firms market capitalization. Thus, in our further study we calculate and mainly discuss results for all transactions as well as transactions that are at least 0.1% of the firms market capitalization.

C. Insider Hierarchy Hypothesis 3 postulates that high-level executives have an information advantage over lowlevel executives. Specifically, we assume that insider transactions by high-level executives should result in stronger announcement effects than those of low-level executives. We use two approaches to test this hypothesis. First, we compute CAARs for all three insider classes (A to C) and compare the results. Second, we perform a multivariate OLS regression with CAAR(0;1) as the dependent variable and insider classes as dummy variables. Table VI reports the results for all transactions from our final data sample. For purchase transactions, only in the U.K. does insider class A (top-level executives)

practice as "stealth trading". Since we only observe transactions which are not anonymous, the "stealth trading" hypothesis cannot be fully connected to our study. Nevertheless, we assume that even in a not anonymous market insiders might hide (at least to some extend) behind several medium-size trades rather than executing one large block transaction. For further discussion on the "stealth trading" hypothesis see also Blau et al. (2009) and Lebedeva et al. (2009). 27 See also Giamouridis et al. (2008). 28 All results are available upon request.

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seem to trigger the highest (significant) CAARs. The differences between insider classes are relatively small, however the CAARs show a hierarchical pattern what let us assume that insider class A is indeed best informed in the U.K. For Sweden and Italy, we find the highest CAARs(0;1) for insider class C. In Germany we find about the same results across all insider classes. In Ireland, the announcement effect is largest for insider class B. In France we do find a clear hierarchal pattern for CAAR(0;4), however, none of the results are statistically significant. Altogether, we find only incoherent results from our univariate insider hierarchy test. We further test the hierarchy hypothesis by performing a multivariate regression (Table VII). The OLS regression models include a dummy variable for each insider class, where Insider class A is the reference category. Hence, a positive coefficient for Insider class B or Insider class C indicates that the announcement effect of Insider class A is smaller in magnitude and therefore contradicts the hierarchy hypothesis. A negative coefficient for Insider class B or Insider class C indicates the opposite and consequently supports the hierarchy hypothesis. In conjunction with the hierarchy hypothesis, we also test hypothesis 4, which postulates that multiple trades by directors on the same day will give a stronger signal to the market. In particular, we include the dummy variable Multiple trade, which equals one if more than one insider trades in a firm on a given day, and zero otherwise. Moreover, we include other control variables in our regression model. From the univariate results, it is apparent that (relative) transaction size is crucial for the size of the announcement effect. Thus, we construct Transaction size, which is the number of shares traded, divided by shares outstanding on the day of the announcement. To control for firm size we construct the variable Firm size, which is the natural logarithm of the number of shares outstanding multiplied by the closing price of the underlying share on the trading day. We discuss the relation between firm size and announcement effects separately in the section below. We further include the variable Book to market, which is the book to market value at the beginning of the year when the transaction took place.29 According to Lakonishok and Lee (2001), insiders tend to purchase stocks that are cheap according to the book to market value. We also believe

29

A high book to market value (above 1) indicates that a stock is undervalued.

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that announcement effects will be larger in undervalued than overvalued stocks. Thus, we expect a positive relationship between book to market ratios and CAARs. Furthermore, we include the variable Momentum, which measures the performance of shares 100 trading days prior to the transaction day. Since company insiders seem to have a contrarian investment style, we expect a negative relationship between Momentum and post-event CAARs. We construct Momentum by calculating the market-adjusted CAARs for 100 days prior to the insider transaction.30 We also examine whether the frequency of trading in a specific firm has an influence on the announcement effect. We expect a smaller announcement effect in firms with frequent insider trading compared to firms with less insider trading. The rationale behind this is that if insiders, for instance, trade on a monthly basis we expect the information content of these trades to be lower than for one single trade in a year. Therefore, we construct the dummy variable Frequent trading, which is set to one if the average trade frequency in a firm 12 months prior to a transaction is higher than the average trade frequency of all firms in 12 months prior to the transaction in the respective country, and zero otherwise.31 In addition, we construct two dummy variables Previous buy and Previous sell, which control for previous purchases or sales before the respective announcement. Previous buy is set to one if at least one (large) purchase has been announced 20 days before the respective (large transaction) announcement, and zero otherwise. Previous sell is set to one if at least one (large) sale has been announced 20 days before the respective (large transaction) announcement, and zero otherwise. We also include the variable Day gap, which measures the number of days between trading and announcement days. Due to information leakage we expect directors dealings reports with large differences between transaction and announcement days to have smaller announcement effects. Thus, we expect a negative relation between Day gap and CAARs.32

Given that Momentum controls for the market timing ability of insiders, it is important to note that it is calculated relative to the trading and not the announcement day. 31 The average trade frequency per firm and country is calculated by dividing the number of all trades 12 months prior to the transaction by the number of firms, which reported at least one directors dealings within 12 months prior to a transaction. For each country the dummy variable starts one year after the beginning of the observation period for the respective country. 32 See Betzer and Theissen (2010) for a detailed analysis of reporting delays in the German market.

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Finally, we include the dummy variable Legal change, which is set to one if the transaction has been performed after the implementation of the Market Abuse Directive 2003/6/EC, and zero otherwise.33 Since Ireland and the U.K. had exceptionally well-developed legal frameworks for directors' dealings before the implementation of the Market Abuse Directive, we omit Legal change for these countries to avoid unnecessary noise. All regression models include year dummies as well as industry sector dummies, which we further analyze in a separate section below. Panel A of Table VII shows the regression results for purchase transactions. In contrast to the univariate results, we find a slight indication for insider hierarchy in France since the coefficient for Insider class C is negative at the 10% level. For Sweden, we find a similar picture because the Insider class B coefficient is negative at the 10% significance level. Both observations indicate that trades by top-level executives trigger stronger market reactions than those of low-level executives in France and mid-level executives in Sweden. Only for Ireland do we find statistically significant results for both Insider class coefficients. However, both are positive, which indicates that top-level executives trigger the lowest announcement effects, contradicting the hierarchy hypothesis. For the U.K. none of the coefficients are significant, thus we cannot confirm our univariate results that top-level executives trigger the highest CAARs. Panel B of Table VII shows regression results for sell transactions. For the hierarchy hypothesis to hold, we expect positive signs for the Insider class coefficients. Only for Germany we find a significantly positive coefficient for Insider class C. Correspondent to previous studies we conclude that insider hierarchy has only a minimal influence on the announcement effect for the countries in our sample. Only for France and Sweden do we find tentative evidence for the insider hierarchy hypothesis. Considering that our study is based on eight countries we do not see enough support to verify the information hierarchy hypothesis. Other noteworthy results are the significantly positive coefficients for Ireland in Panel A, which suggest that lower-class executives such as divisional/regional CEOs, company secretaries or group directors trade on more valuable information than CEOs. Similar to the findings from Fidrmuc et al. (2006), we

For Austria and France we use the starting dates of the public announcements of directors dealings by the regulatory authorities, which are reported in Table I.

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explain these results through high-level executives being more closely observed by regulatory authorities and therefore reluctant to trade at informative moments.34

D. Multiple Trades The multivariate OLS regression reported in Table VII also presents a test of Hypothesis 4. Panel A reports positive and significant coefficients for the Multiple trade dummies in Ireland, Italy, Sweden, and the U.K. This suggests that announcements by various directors on the same day lead to higher market reactions. Corresponding results for sell transactions are provided in Panel B. Only for Ireland we find a significant coefficient, which, however, is positive. This reverse relation contradicts the assumption that multiple trades by different insiders on the same day increase the announcement effect. A possible explanation for this reverse relation is that in some companies the executives are required to hold certain percentages of their annual cash bonuses in stocks.35 If these performance related annual cash bonus increases or decreases simultaneously for all executives this can result in multiple transactions by several insiders on the same day. Obviously, such transactions are remuneration-related and only have a low informative content for outsiders. Generally, however, we conclude that multiple trades by several directors on the same day lead to higher announcement effects.

E. Firm Size Hypothesis 5 postulates that firm size has a reverse influence on the announcement effect. Panel A of Table VII shows significantly negative coefficients at the 1% level for Firm size for Germany, Sweden, and the U.K. These results clearly show that firm size is an important determinant for announcement effects after purchases in these countries. Considering that all of these countries show announcement effects (see Table V) and have relatively large and developed capital markets it is somehow surprising that other countries with large capital markets such as France or Italy do not show
Fidrmuc et al. (2006) find that large purchase transactions by CEOs trigger smaller announcement effects than large transactions by other executives. Similar to Fidrmuc et al. (2006), we also find significantly positive Insider class B coefficients for the U.K. after performing the multivariate regression on the large transactions sample. 35 An example of a company which requires executives to invest certain percentages of their annual cash bonuses in the company's stocks is BT Group Plc (cf. BT Groups annual report of 2009).
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any (statistically significant) firm size effects. Overall, we expected a more uniform relation between firm size and announcement effects. For purchase transactions, for instance, none of the French law countries showed firm size effects. Thus, we conclude that firm size is an important determinant for the announcement effect, which however greatly depends on the country.

F. Legal Change Panel A of Table VII reports significantly positive Legal change coefficients for Sweden and the Netherlands. This indicates that improved reporting standards had a positive impact on the announcement effect in both countries. After the implementation of the Market Abuse Directive the contents of directors' dealings reports improved noticeably in both countries. Specifically, directors' dealings reports became more detailed with regard to the insider name, position and transaction type. This leads to the conclusion that an increase in information on specific transactions and better reporting will enhance investing based on directors' dealings and thus lead to stronger announcement effects. Panel B reports significantly negative results for Legal change in France, which also indicates a stronger announcement effect. For Austria, Germany and Italy we do not obtain any significant coefficients for Legal change. Since Austria generally does not show any announcement effects this is not surprising. For Germany we explain this with the early implementation of the Market Abuse Directive in October 2004, which is almost at the beginning of our entire observation period. Italy, on the other hand is a unique case. It had relative good reporting standards already before the implementation of the Market Abuse Directive, however, regulations were largely ignored and violations not prosecuted.36 The transition process to an efficient prosecution takes a lot longer than implementation of better reporting standards in already well-functioning legal systems. This is because court cases for instance can take up to several years. In Italy the transition process to an improved legal system, similar to the well-functioning systems in the U.K., Sweden or Germany is also sneaking and thus no noticeable changes in announcement effects are visible in the short-run.

36

See also Bajo et al. (2006).

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G. Explaining Cross-Country Differences Considering our overall results, we conclude that announcement effects exist but vary greatly in size across countries. There are several possible explanations as to why some countries show substantial announcement effects and others do not. Previous studies suggest that the legal origin, as categorized by La Porta et al. (1998), plays an important role in explaining cross-country differences for insider trading profitability.37 Aussenegg and Ranzi (2008), for instance, compare short-term market reactions between countries of French and German legal origin. By grouping countries according to the legal origin, the authors implicitly assume that the legal origin must be relevant in explaining announcement effects after insider trading. Our findings also indicate that the legal origin partially explains cross-country differences. English law countries (U.K. and Ireland) show the strongest market reactions. On the other hand, French law countries (France, Italy, and the Netherlands) collectively show the smallest reactions to insider trades. Sweden, which is the only Scandinavian law country in our dataset, shows moderate results. For German law countries (Germany and Austria) we obtain ambivalent results, whereby it is noteworthy that Austria has a relatively small capital market and exploiting insider trade announcements might be a rather uncommon practice. In addition to the legal origin, Fidrmuc et al. (2010) suggest that several country-specific corporate governance measures explain the differences in market reactions to directors dealings. As corporate governance measures Fidrmuc et al. (2010) use (among others) the legal origin described above and the legal protection of minority shareholders against self-dealing by corporate insiders. They find stronger market reactions to purchases in countries with good corporate governance. However, for sales they find weaker reactions in countries with good corporate governance. Our results are in line with the explanation provided by Fidrmuc et al. (2010) because we report substantially higher abnormal returns for Ireland and the U.K. Both countries are common law countries, which are known to have stronger corporate governance regulations than civil law countries. Moreover, we assume that technical issues such as the accessibility of directors dealings reports by the public play a crucial role in explaining cross-country differences. According to the Market Abuse and Transparency Directive

37

La Porta et al. (1998) categorizes countries based on the legal protections of shareholders (investors). He concludes that English (common) law countries generally have the strongest investor protection, Germany and Scandinavian law countries moderate investor protection, and French law countries the worst investor protection.

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companies announcing directors dealings have to fulfill certain quality standards regarding the timely accessibility of the reports by the public.38 However, both directives have been implemented by each European member state in a different fashion, which is reflected in the quality of directors dealings reporting. The U.K., Ireland and Germany for instance have well-organized and efficient reporting systems. Directors dealings reports are accessible for the public in a timely manner through the London Stock Exchange internet page in the U.K. or adhoc news portals in Germany such as the DGAP internet page.39 Moreover, the investor relations in these countries are often well informed in the case of queries regarding directors dealings reports. In contrast, for Austria, France and the Netherlands the reporting standards are lower and directors dealings reports are substantially harder to obtain in a timely manner. We find substantial reporting delays in these countries even for transactions performed after the implementation of the Market Abuse Directive. Specifically, the mean reporting delay is ten (calendar) days for Austria, nine days for France, seven days for the Netherlands, four days for Italy, Germany and Sweden, one day for Ireland and the U.K. For the period after the implementation of the Transparency Directive (see Table I) we see an increase in reporting speed in almost each country, however, the reporting delays are still relatively high for some countries. Specifically, nine (calendar) days for France, eight days for Austria, four days for Italy and the Netherlands. The lower reporting standards in these countries become more evident when one considers that most companies in Europe report directors dealings not only on an officially appointed central storage internet page (as required by the Transparency Directive) but also on the companys website. In France, the officially appointed central storage internet page is the Autorit des marchs financier internet page, which displays directors dealings with delays of at least one day after they have been reported on a companys website. We observe similar delays for transactions announced on

Directive 2004/109/EC, requires the Member State to ensure that there is at least one officially appointed mechanism for the central storage of regulated information. These mechanisms should comply with minimum quality standards of security, certainty as to the information source, time recording, and easy access by end users. (Article 21 & 22) 39 In the U.K. all transactions are reported in a timely manner on the LSE internet page: http://www.londonstockexchange.com/exchange/prices-and-news/news/market-news/market-news-home.html, After the implementation of the Transparency Directive in Germany about 90% percent of all transactions are reported on the http://www.dgap.de; and http://www.euroadhoc.de.

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the Austrian as well as the Dutch central storage internet pages.40 For some transactions we observed delays of as many as ten trading days after they have been reported on a companys webpage. On the other hand, in Germany directors dealings are reported almost simultaneously on the publicly available DGAP internet page and a companys website. The difference in reporting quality can be also observed in cross-listed companies, which report the same transactions in different countries. For instance, while the same transaction is reported on the trading day in Germany, it might take up to four days until this transaction is reported in the Netherlands.41 A substantially delayed reporting in the central source of information for directors dealings makes the exploitation of insider trades by outsiders difficult since they must monitor several news portals and companys website simultaneously or pay costly data vendors to get the most current data on directors dealings. Thus, our results indicate that timely and publicly available reporting as proposed by the Market Abuse and Transparency Directive, plays a crucial role in explaining cross-country differences.

H. Industry Sector Analysis Hauser and Vermeersch (2002) point out the increasing importance of sector diversification for stock selection. We therefore switch our focus to sectors and assess Hypothesis 6. To test whether announcement effects are larger in certain sectors we first group all CAARs into eight sectors across all countries and compare the results.42 Sector categorization is provided by Compustat. To achieve sufficient sample sizes, we merge Information Technology and Telecom to IT, as well as Energy and Utilities to Energy. Second, we perform a multivariate regression with sectors as dummy variables in a similar fashion as we have done above. Since we believe that healthcare is the most R&D-intensive sector we use this sector as the base category. Table VIII presents the univariate results for each sector. The results for CAAR(0,1), show the largest announcement effects in the healthcare, energy and IT sectors, whereas the consumer, financials, and materials sectors show the

Austria: http://www.fma.gv.at/cms/site/EN/index.html, France: http://www.amf-france.org/, the Netherlands: http://www.afm.nl/en.aspx. 41 Examples of companies which are subject to the above described reporting delays are Adecco S.A., which reports in France, the U.K. and Switzerland; Qiagen N.V., which reports in the Netherlands and Germany; conwert Immobilien Invest S.E., which reports in Austria. 42 We are aware that measures such as R&D expenses to sales would better describe the R&D intensity of firms. However, due to limited data availability we identify R&D-intensive firms based on the industry sector.

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smallest announcement effects. These observations are in line with our assumption that announcement effects are largest in R&D-intensive sectors. For the energy sector we see two reasons for the high abnormal returns. First, due to the worldwide increase in demand for products, specifically oil, from the energy sector during our observation period, the stocks in this sector have generally performed exceptionally well. Second, because of the simple structure of these products (e.g. oil, gas) and their strong correlation to the overall performance of the energy sector, we believe that the predictability of (long-term) price changes is relatively simple for anybody who might have even a small information advantage.43 Thus the market is, in particular, sensitive to purchase or sales signals from insiders in this sector, which is reflected in the large announcement effects. To confirm our univariate results we perform the same multivariate regression as above but on the entire European data sample by including country dummy variables. The results are presented in Table IX. For purchase transactions, we find that all sector dummies have a negative coefficient, which suggests that announcement effects are indeed higher in the healthcare sector. However, for Energy the coefficient is not statistically different from zero what confirms our univariate results. For IT the coefficient is statically different from zero at the 5% significance level, which, however, is low compared to the other remaining sector dummies which are significant at the 1% level. Altogether, we conclude that the exploitation of directors dealings announcements seem to be most worthwhile in the energy, healthcare and to some extent in the IT sectors.

V.

Conclusion

In this paper, we examine whether announcements of directors dealing reports are informative for outside investors in a broad selection of European countries. We use similar observation periods, similarly structured data samples, and apply analogous testing methods for each country. The data is adjusted for transactions that follow or precede mergers, capital increases, remunerations, and other effects that might distort the examination of the announcement effect. We test each country for several determinants that are known from previous literature to influence announcement effects.

43

See also Brevik and Kind (2004) who investigate the main determinates for the price formation of oil.

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We find substantial announcement effects for purchases in Germany, Sweden, Ireland, and the U.K. The announcement effects are largest for the U.K. and Ireland. Our results confirm findings from previous literature that sales have lower information content than purchases. This is because insiders have many motives for selling their companys stocks, such as for liquidity reasons or portfolio diversification, whereas they have only one motive for purchasing stocks, which is to earn returns on an investment. Furthermore, reactions in the markets are stronger after large trade announcements than after small trade announcements. This is due to the higher signaling effect of large trades compared to small trades. In most countries top-level executives do not trigger the strongest announcement effects. Only for France and Sweden do we find tentative evidence of an insider hierarchy. These results are in line with previous studies but nevertheless surprising since top-level executives are expected to be best informed about the value of their companys assets. A possible explanation is that top insiders are closely watched by regulatory authorities and news media and do not want to attract attention by earning large profits with their companys stocks. This is especially evident for Ireland, where lowlevel executives trigger stronger announcement effects than top-level executives. Finally, we find that directors dealings announcements lead to highest abnormal returns in the R&D-intensive sector healthcare as well as the energy sector. Overall, our paper reveals that directors dealings are informative in European stock markets. Our results imply that under certain conditions outside investors can profit noticeably from insider trade announcements. However, we do not regard our results as fully detached from market efficiency. For countries with the strongest announcement returns such as Germany, Sweden, and the U.K., the abnormal returns are substantially larger when the insider transactions are made in small firms. This, however, shows that the profitability of insider transactions cannot be taken for granted, since smallcap stocks are less liquid and have higher bid-ask spreads. Nevertheless, due to the magnitude of our results we are still confident that correctly filtered directors dealings give valuable information for stock selection and analysis. The recently implemented E.U. directives 2003/6/EC and 2004/109/EC, set the path for faster and better reporting of directors' dealings across all European member states. Despite these efforts by the E.U. Commission to harmonize European Capital markets we still found significant differences in reporting standards, quality and consequently short-term announcement 27

effects in most countries from our data sample. Generally, we found that countries which have accurately translated the directives into their regulatory framework show stronger short-term announcement effects than countries, which rather neglect strict implementation of the directives. This gives strong reason to believe that the directives imposed by the E.U. Commission indeed lead to more informative directors' dealings reports combined with faster price adjustments and thus to more efficient markets. It is, however, up to each single member state to translate these directives carefully into its law and accurately prosecute any violations. Our results strongly indicate that these efforts should be taken upon by each member state. After all, the reward could be a more competitive and efficient European financial market, at least with respect to directors' dealings disclosures.

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30

Mazars, Transparency Directive Assessment Report, 2010 available at: http://www.mazars.co.uk/Home/News/Our-publications/General-publications/Transparency-DirectiveAssessment-Report Piotroski, J. D. and Roulstone, D. T., Do insider trades reflect both contrarian beliefs and superior knowledge about future cash flow realizations?, Journal of Accounting and Economics, Vol. 39, 2005, pp. 55-81. Pope, P. F., Morris, R. C. and Peel D. A., Insider trading: some evidence on market efficiency and director's share dealings in Great Britain, Journal of Business Finance & Accounting, Vol. 17, 1990, pp. 359-380. Rozeff, M. S. and Zaman, M. A., Market efficiency and insider trading: new evidence, Journal of Business, Vol. 61, 1988, pp. 25-44. Seyhun, H. N., Insider profits, costs of trading, and market efficiency, Journal of Financial Economics, Vol. 16, 1986, pp. 189-212. Seyhun, H. N., Why does aggregate insider trading predict future stock returns?, Quarterly Journal of Economics, Vol. 107, 1992, pp. 1303-1331. Stotz, O., Germanys new insider law: The empirical evidence after the first year, German Economic Review, Vol. 7, 2006, pp. 449462. Zingg, A., Lang, S. and Wyttenbach, D., Insider Trading in the Swiss Stock Market, Swiss Journal of Economics and Statistics, Vol. 143, 2007, pp. 331-362.

31

Table I European Regulations on Directors Dealings


This table gives an overview on the implementation dates of the Market Abuse Directive 2003/6/EC (MAD) and the Transparency Directive 2004/109/EC (TD) in each country. Legal origin, as categorized by La Porta et al. (1998).
Country (legal origin) Austria (German) France (French) Date of major legal change within observation period. MAD TD Regulatory authority Finanzmarktaufsicht (FMA) Acts/Laws regulating Directors' Dealings 48 d Abs. 4 BrseG/ 82 Abs. 8 BrseG Article 621-18-2 Code montaire et financier/ Article 223-22 - 223-26 du rglement gnral de lAMF

Before the implementation of the MAD, there was no public disclosure of dd's. In May-05, the regulatory authority started to publicly announce dd's on its website. Before the implementation of the MAD, there was no public disclosure of dd's. In Mar-06, the regulatory authority started to publicly announce dd's on its website.

Jan-05 Jul-05

Apr-07

Sep-06 first part/ Autorit des marchs Dec-07 final financiers (AMF)

Germany (German)

Before the implementation of the MAD, dd's had to be reported "without delay". The regulatory authority, however, did not explicitly define what "without delay" means, which resulted in substantial reporting delays (see also Betzer and Theissen (2010)). After the implementation of the MAD the reporting of dd's improved significantly, however, some companies still reported dd's only on their web pages or in the newspaper. After the implementation of the TD companies are required to report via ad-hoc newsportals such as www.dgap.de, www.euroadhoc.de or www.hugingroup.com. Ireland's legal framework is primarily governed by the Companies Law which is adopted from the U. K. Therefore, similar to the U.K., Ireland had an effective regulatory framework for dd's prior to the implementation of the MAD and the TD. Thus, both directives led to unnoticeable changes in dd's disclosure requirements.

Oct-04

Jan-07

Bundesanstalt fr 15a WpHG Finanzdienstleistungsaufsicht (BaFin)

Ireland (English)

Oct-05

Jun-07

Irish Financial Services Regulatory Authority (Financial Regulator)

Companies Act (1990) - Part IV

Italy (French)

Compared to other Continental European countries, Italy had a well established regulatory framework before May-05 Dec-08 first part/ Commissione Nazionale per Aug-09 final le Societ e la Borsa the implementation of the MAD and TD. For instance, dd's had to be reported to the regulator within five (CONSOB) business days. However, most regulations were largely ignored and violations remained without sanctions (see also Bajo et al. (2005)). Before the implementation of the MAD, dd's had to be reported before the 10th day of the month subsequent to the transaction. After the implementation of the MAD, dd's reporting standards improved by providing more details on the insider position and transaction type in dd's reports. Oct-05 Jan-07 first part/ Autoriteit Financile Jan-09 final Markten (AFM) Jul-07 Finansinspektionen (FI)

Article 114 and article 193 Testo Unico della Finanza e gli / Article 152-sexies e seguenti del Regolamento Emittenti Consob Wte 1995 Art. 47a

Netherlands (French)

Sweden had an effective regulatory framework for dd's prior to the implementation of the MAD. However, Sweden (Scandinavian) the new regulatory framework further restricted dd's by imposing a one-month trading gap prior to final and interim earnings announcements. After the implementation of the MAD, dd's reporting standards further improved by providing more details on the insider position and transaction type in dd's reports. U. K. (English) The U.K. had an effective regulatory framework for dd's prior to the implementation of the MAD/ TD, which included a maximum reporting period of five business days and a two-month trading gap prior to final and interim earnings announcements.

Jul-05

Market Abuse Penal Act (2005:377)/ Swedish Companies Act (2005:551) Company Securities Act 1985/ Financial Services and Markets Act 2000

Jul-05

Jan-07

Financial Services Authority (FSA)

32

Table II Summary Statistics for Final Data Sample


This table shows the final data sample for all (net) insider purchases, sales between 01/2003 and 12/2009. The final observation number is 44,907, which represents 29.52% of the original data sample. Country Purchases Sales Purchases Sales Purchases Sales Purchases Sales Purchases Sales Purchases Sales Purchases Sales Purchases Sales Total 2003 6 4 0 0 221 235 0 1 64 44 23 49 0 0 365 127 1,139 2004 3 6 2 4 224 383 0 1 63 84 26 67 832 579 363 115 2,752 2005 36 49 101 335 450 651 27 10 248 218 30 70 982 734 621 282 4,844 2006 40 29 317 527 721 590 53 12 734 733 69 100 1279 814 1109 604 7,731 2007 225 73 630 770 1039 421 98 18 1400 510 170 184 1569 667 2309 664 10,747 2008 284 37 989 267 1904 165 127 12 2020 254 195 39 1543 411 2645 323 11,215 2009 119 40 599 350 632 246 32 18 838 258 67 62 977 400 1458 383 6,479

Austria

France

Germany

Ireland

Italy

Netherlands

Sweden

U.K.

33

Table III Summary Statistics for European Insider Trades


This table shows all (net) insider purchases, sales, option related sales and exercises between 01/2003 and 12/2009. No. of trades per firm/year is the average number of insider trades per firm and year. % Market capitalization is the average percentage of the firms capitalization which is traded by insiders per firm and year. Market capitalization is calculated as shares outstanding multiplied with the closing price of the underlying share on the trading day. Option related Sales Sales & Option related Sales 1.40 0.64% 54 2.04 0.72% 384 1.26 1.38% 439 1.11 0.46% 31 2.88 1.19% 237 2.90 0.75% 103 2.44 1.15% 307 1.28 0.37% 736

All Austria No. of trades per firm/year % Market capitalization Number of firms France No. of trades per firm/year % Market capitalization Number of firms Germany No. of trades per firm/year % Market capitalization Number of firms Ireland No. of trades per firm/year % Market capitalization Number of firms Italy No. of trades per firm/year % Market capitalization Number of firms Netherlands No. of trades per firm/year % Market capitalization Number of firms Sweden No. of trades per firm/year % Market capitalization Number of firms UK No. of trades per firm/year % Market capitalization Number of firms 3.72 0.48% 1316 8.54 1.61% 284 6.33 1.24% 126 7.23 2.69% 328 4.41 0.90% 507 3.60 1.67% 573 3.85 0.59% 43

Purchases

Sales

Exercises

5.10 1.08% 75

3.32 0.62% 70 1.94 0.36% 398 2.07 1.67% 499 2.27 0.26% 40 5.14 0.56% 252 1.90 0.45% 110 4.78 1.66% 315 1.93 0.25% 1213

1.24 0.62% 54 1.58 0.73% 366 1.09 1.39% 431 0.54 0.43% 28 2.06 1.17% 232 1.52 0.80% 88 2.34 1.15% 306 0.53 0.35% 628

0.16 0.11% 6 0.46 0.08% 130 0.18 0.10% 79 0.57 0.11% 21 0.83 0.12% 82 1.39 0.10% 70 0.09 0.04% 41 0.76 0.11% 471

0.38 0.23% 14 0.42 0.28% 136 0.27 0.26% 122 0.47 0.05% 16 0.52 0.44% 75 1.53 0.39% 76 0.01 2.14% 2 0.51 0.12% 481

34

Table IV Summary Statistics for European Insider Trades by Insider Class


This table shows (net) purchases and sales by insiders in Austria, France, Germany, Ireland, Italy, the Netherlands, Sweden, and the U.K. between 01/2003 and 12/2009. Large transactions are (net) purchases and sales that are larger than 0.1% of the firms market capitalization. Trade value is the total volume in euros traded by all insiders across the entire sample. % Market capitalization (total) is the total volume traded as a percentage of the firms market capitalization across all firms. Insiders are classified into the following three classes. Insider class A: CEO, Deputy CEO, CFO, COO, President, chairman (also non-executive), and similar corporate positions as well as respective family members. Insider class B: Divisional/regional CEO, CEO of subsidiary, Vice President, non-executive vice-chairman, Chief Information Officer, Chief Scientific Officer, Officer, managing director, executive director, company secretary, group director, upper management, and similar corporate positions as well as respective family members. Insider class C: Non-executive board member, (non-executive) director, supervisory board member, board of auditors, lower class executive (sales director, technical manager etc.), upper management of subsidiaries, former CEO/executive/board member, divisional/regional director and similar corporate positions as well as respective family members. Panel A: All Transactions Net purchases Trade value ('000) % Market capitalization (total) % Market capitalization by insiderclass Insider class A Insider class B Insider class C Net Sales Trade value ('000) % Market capitalization (total) % Market capitalization by insiderclass Insider class A Insider class B Insider class C 4,240 5,291 4,498 12,677 7,678 10,523 14029 1,469 0.44% 0.59% 0.32% 0.42% 96 0.03% 0.06% 0.02% 0.03% 1.00 0.00% 0.00% 0.00% 0.00% 2,510,000 72.28% 72.28% 69.61% 65.67% N 30878 Mean 407 0.12% 0.12% 0.08% 0.15% Median 27 0.01% 0.02% 0.01% 0.01% Minimum 1.00 0.00% 0.00% 0.00% 0.00% Maximum 600,000 43.66% 23.09% 43.05% 43.66%

Panel B: Large Transactions (> 0.1%*Mcap) Net purchases Trade value ('000) % Market capitalization (total) % Market capitalization by insiderclass Insider class A Insider class B Insider class C Net Sales Trade value ('000) % Market capitalization (total) % Market capitalization by insiderclass Insider class A Insider class B Insider class C 1,701 1,105 1,301 2,373 605 1,598 4107 4,381 1.43% 1.43% 1.47% 1.41% 460 0.37% 0.41% 0.33% 0.36% 1.77 0.10% 0.10% 0.10% 0.10% 2,510,000 72.28% 72.28% 69.61% 65.67% N 4576 Mean 2,199 0.71% 0.55% 0.88% 0.88% Median 166 0.24% 0.22% 0.22% 0.27% Minimum 1.22 0.10% 0.10% 0.10% 0.10% Maximum 600,000 43.66% 23.09% 43.05% 43.66%

35

Table V Cumulative Abnormal Returns for Insider Trades by Country


This table reports the CAARs for directors trades between 01/2003 and 12/2009. t-statistic is the lowest absolute value of all four test statistics applied for each CAAR and Observation (tCAAR, trank, J1, J2). Large transactions are (net) purchases and sales that are larger than 0.1% of the firms market capitalization. All CAARs have been computed in an event-study framework as proposed by MacKinlay (1997). An estimation window of 180 trading days and an observation window of 41 days centered on the announcement day have been used. The market return is approximated by the corresponding (Gross) MSCI Barra Performance Share Index for each single country. Panel A: All Transactions Country N Austria Purchases CAAR t-statistic Sales CAAR t-statistic Purchases France CAAR t-statistic Sales CAAR t-statistic Germany Purchases CAAR t-statistic Sales CAAR t-statistic Purchases Ireland CAAR t-statistic Sales CAAR t-statistic Purchases Italy CAAR t-statistic Sales CAAR t-statistic Netherl. Purchases CAAR t-statistic Sales CAAR t-statistic Purchases Sweden CAAR t-statistic Sales CAAR t-statistic Purchases U. K. CAAR t-statistic Sales CAAR t-statistic 713 0.00% 0.00 238 0.64% -0.85 2,638 0.10% 0.88 2,253 -0.22% -2.35 5,191 0.58% 4.20 2,691 -0.44% -2.55 337 1.56% 3.56 72 -0.24% -0.38 5,367 0.22% 2.05 2,101 -0.28% -2.62 580 0.41% 2.64 571 -0.34% -1.64 7,182 0.27% 4.33 3,605 -0.43% -3.83 8,870 1.84% 8.29 2,498 -0.35% -2.80 -0.72% -3.49 2.49% 8.45 -2.31% -4.47 2.48% 7.76 -4.53% -6.86 3.89% 5.73 694 -0.41% -0.88% -2.65 -2.62 2.48% 5.34 -2.67% -2.76 -0.81% -3.74 1.48% 6.00 -2.60% -5.42 1,069 6.12% 10.63 7.21% 8.12 -4.74% 11.22% -2.95 6.71 0.53% 4.87 -1.44% -3.82 0.83% 5.12 995 -0.82% -1.39% -4.23 -3.80 1.05% 1.76 -3.15% -3.54 -0.13% -0.47 -0.41% -0.23 -0.50% -0.26 1,006 1.27% 7.48 1.75% 6.59 -0.06% -0.12 1.48% 3.17 0.31% 1.13 -0.93% -0.63 0.42% 0.99 118 -0.67% -0.63 1.09% 1.11 -4.12% -2.23 -0.55% -0.20 -0.59% -3.50 2.28% 6.39 -2.00% -4.58 46 1.17% 1.54 1.89% 1.70 3.66% 1.33 1.87% 0.82 0.52% 3.00 -2.84% -8.89 1.05% 3.38 486 -0.33% -0.34% -1.12 -0.75 3.67% 2.82 -0.99% -1.33 -0.80% -1.09 -1.02% -0.04 -4.31% -1.72 603 0.49% 2.52 0.63% 2.47 -0.76% -1.31 1.06% 1.04 1.70% 2.32 -3.04% -2.05 1.52% 0.44 21 -1.32% -3.04% -0.77 -2.01 0.76% 0.23 -9.05% -2.44 -0.97% -2.69 2.39% 6.48 -3.22% -4.40 35 5.03% 2.87 4.52% 1.52 2.73% 0.70 6.91% 1.72 1.23% 5.75 -3.74% -7.64 2.39% 6.56 1,137 -0.68% -1.45% -2.19 -1.82 3.15% 4.95 -4.15% -3.59 -0.51% -3.05 1.55% 5.85 -1.37% -3.15 1,170 1.11% 4.86 1.75% 5.51 -2.02% -3.19 2.75% 4.88 0.17% 0.59 -1.37% -3.76 1.34% 2.64 581 -0.18% -0.49% -0.55 -1.39 2.81% 3.73 -1.53% -2.07 1.14% 0.18 -0.62% -0.48 -2.02% -0.97 517 0.36% 1.49 1.16% 3.71 -0.19% -0.31 2.94% 4.77 0.45% 1.30 -0.39% -0.56 2.63% 2.79 75 1.45% -0.35 0.34% -0.41 -1.11% -0.51 -6.27% -2.95 CAAR (0;1) CAAR (0;4) CAAR (-20;-1) CAAR (0;20) Panel B: Large Transactions (> 0.1%*Mcap) N 130 0.80% 1.09 1.97% -0.09 4.63% 2.02 6.32% 3.39 CAAR CAAR CAAR (0;1) (0;4) (-20;-1) CAAR (0;20)

36

Table VI CAARs (0;1)/ (0;4) for Large Insider Trades by Insider Class
This table reports the cumulative abnormal returns of all transactions by insider class (for detailed description of insider classes see Table IV). t-statistic is the lowest absolute value of all four test statistics applied for each CAAR and Observation (tCAAR, trank, J1, J2). CAAR (0;1) Austria 329 247 137 0.07% 0.16 -0.49% 0.02 0.72% 0.99 3.08% 1.50 -0.61% -1.97 -0.24% -0.13 Italy 2428 1362 1577 0.15% 1.28 0.22% 1.36 0.34% 2.65 -0.32% -1.92 -0.44% -2.34 -0.07% -0.36 0.54% 2.87 0.49% 1.89 0.53% 2.85 -0.93% -3.34 -0.64% -2.03 -0.24% -0.97 228 235 117 0.88% 1.57 0.01% 0.02 0.21% 0.33 5.82% 0.33 -0.77% -1.07 -1.72% -1.39 1639 216 783 0.18% 1.68 0.26% 0.97 -0.13% -0.36 -0.24% -2.40 -0.13% -1.00 -0.27% -1.02 CAAR (0;4) CAAR (0;1) France 0.41% 1.78 -0.04% -0.10 -0.28% 0.33 -0.51% -3.06 -0.42% -1.91 -0.60% -1.34 2759 1347 1085 0.63% 4.26 0.44% 2.48 0.63% 3.29 -0.70% -2.52 -0.41% -1.99 -0.20% -1.08 Sweden 1172 2845 3165 0.33% 3.07 0.03% 0.24 0.47% 6.40 -0.56% -2.29 -0.39% -2.72 -0.43% -3.24 0.74% 4.16 0.22% 1.12 0.74% 6.26 -1.01% -2.79 -0.74% -2.36 -0.83% -3.13 3992 1381 3497 2.21% 8.35 1.95% 5.60 1.39% 7.82 -0.36% -2.19 -0.26% -1.84 -0.47% -2.41 CAAR (0;4) CAAR (0;1) Germany 1.25% 5.42 1.34% 4.59 1.02% 3.78 -1.38% -2.96 -0.81% -1.66 -0.69% -1.23 130 45 162 1.61% 2.67 1.92% 1.52 1.41% 2.59 -0.67% -0.60 -0.53% -0.67 0.87% 0.76 U.K. 2.90% 7.81 2.48% 5.24 2.00% 7.33 -0.74% -2.89 -0.65% -2.30 -0.80% -2.81 CAAR (0;4) CAAR (0;1) Ireland 2.30% 2.42 3.31% 2.01 0.77% 0.49 -1.26% -0.76 -1.48% -1.49 1.10% 0.68 CAAR (0;4)

N Purchases Insiderclass A t-statistic Insiderclass B t-statistic Insiderclass C t-statistic Sales Insiderclass A t-statistic Insiderclass B t-statistic Insiderclass C t-statistic Purchases Insiderclass A t-statistic Insiderclass B t-statistic Insiderclass C t-statistic Sales Insiderclass A t-statistic Insiderclass B t-statistic Insiderclass C t-statistic

76 113 49

1049 608 596

955 872 864

22 33 17

Netherlands 0.43% 0.19% 1.78 0.48 0.39% 0.15% 1.49 0.43 0.40% 0.89% 1.32 1.89 -0.30% 0.03 -0.14% -0.57 -0.60% -1.90 0.11% 0.16 -0.27% -0.66 -0.18% -0.09

628 771 702

169 203 199

485 1692 1428

856 999 643

37

Table VII Market Reaction to European Insider Trades by Country


This table shows multivariate OLS regressions with CAAR(0;1) as the dependent variable. Insiders are categorized into three groups (for detailed categorization see Table IV): Insider class A (top-level executives), Insider class B (mid-level executives), Insider class C (low-level and non-executives). Insider class A is the base category. Sector dummy variables are categorized as follows: Healthcare, Energy, Industrials, Consumer Discretionary, Consumer Staples, Financials, IT. Healthcare is the base category. Multiple trade is set to one if more than one insider of a company trades on the same day. Transaction size is the relative size of a transaction based on the shares outstanding on the trading day. Firm size is calculated as the natural logarithm of the shares outstanding multiplied by the closing price of the underlying share on the trading day. Momentum measures the performance of shares 100 trading days prior to the transaction day. Book to market is the book to market value at the beginning of the year when the transaction took place. Frequent trading is set to one if the average trade frequency in the respective firm is higher than the average trade frequency of all firms in the respective country. Previous buy (Previous sell) is set to one if there has been at least one purchase (sale) announcement 20 days before the respective announcement, and zero otherwise. Day gap is the difference (in business days) between trade and announcement day. Legal change, is set to one if the transaction has been performed after the implementation of the Market Abuse Directive 2003/6/EC, and zero otherwise. All models include year dummies. Standard errors are adjusted for heteroscedasticity and tstatistics are reported in parentheses. *,**,*** indicate significance at the 10, 5, and 1% level, respectively. Austria -0.0031 (-0.546) 0.0088 (1.282) -0.0036 (-0.242) -0.0127 (-0.991) -0.0132 (-1.188) -0.0128 (-0.930) France 0.0009 (0.348) -0.0034** (-2.044) 0.0108 (1.014) -0.0003 (-0.083) -0.0048* (-1.679) -0.0054* (-1.933) -0.0022 (-0.669) -0.0072** (-2.544) -0.0036 (-1.254) -0.0015 (-0.741) -0.0381 (-0.662) 0.0004 (1.049) -0.0091* (-1.758) 0.0037*** (4.902) -0.0014 (-0.847) 0.0032* (1.904) 0.0002 (0.050) 0.0001 (0.591) -0.0065 (-1.593) -0.0052 (-0.435) 2638 0.021 Panel A: All Purchases Germany Ireland Italy -0.0012 0.0264*** 0.0012 (-0.612) (2.779) (0.922) 0.0013 0.0202*** 0.0011 (0.612) (3.178) (0.922) 0.0226*** 0.0513** -0.0016 (3.293) (2.190) (-0.467) -0.0013 -0.0094 -0.0024 (-0.294) (-0.522) (-0.623) -0.0046 0.0023 -0.0017 (-1.419) (0.143) (-0.541) -0.0045 0.0364** 0.0029 (-1.311) (2.346) (0.934) 0.0017 0.0068 -0.0023 (0.350) (0.446) (-0.560) -0.0039 0.0048 0.0013 (-1.074) (0.324) (0.444) -0.0050 0.0270 -0.0030 (-1.463) (1.096) (-0.883) -0.0018 0.0232*** 0.0040*** (-0.818) (3.863) (2.894) 0.2909*** 12.3832*** 0.0486 (2.632) (3.571) (0.849) -0.0026*** 0.0028 -0.0003 (-5.306) (0.995) (-0.675) -0.0160*** -0.0239* -0.0112*** (-3.710) (-1.770) (-2.933) 0.0044*** 0.0061 -0.0007 (2.918) (1.282) (-0.646) -0.0011 0.0036 -0.0022* (-0.572) (0.557) (-1.743) 0.0002 0.0063 0.0002 (0.094) (0.974) (0.125) -0.0015 0.0136 0.0001 (-0.351) (0.702) (0.018) -0.0002 -0.0045*** -0.0004** (-1.057) (-2.837) (-2.456) -0.0031 0.0010 (-0.318) (0.376) 0.0532*** -0.0851 0.0084 (4.485) (-1.327) (0.882) 5191 0.030 337 0.308 5367 0.008 Netherl. -0.0004 (-0.098) -0.0042 (-0.692) 0.0196*** (3.137) -0.0081 (-1.122) -0.0004 (-0.083) 0.0050 (0.683) -0.0058 (-1.230) -0.0019 (-0.523) 0.0120* (1.777) 0.0005 (0.183) 0.1451 (0.700) 0.0000 (0.035) -0.0051 (-0.457) -0.0027 (-0.347) 0.0032 (0.872) -0.0053 (-1.501) 0.0029 (0.437) -0.0002 (-0.344) 0.0412*** (3.397) 0.0214 (0.512) 580 0.009 Sweden -0.0030** (-2.560) 0.0013 (1.062) -0.0079 (-1.496) -0.0088*** (-3.247) -0.0057*** (-2.671) -0.0060*** (-2.717) -0.0039 (-1.317) -0.0027 (-1.294) -0.0028 (-1.313) 0.0045*** (3.805) 0.0506 (0.989) -0.0013*** (-5.736) -0.0115*** (-4.638) 0.0002 (0.614) -0.0007 (-0.625) 0.0004 (0.393) -0.0026 (-1.564) -0.0003** (-2.312) 0.0056*** (3.171) 0.0322*** (6.506) 7182 0.023 U.K. 0.0038 (1.390) -0.0011 (-0.631) -0.0042 (-0.876) -0.0109** (-2.282) -0.0076* (-1.834) -0.0154*** (-3.887) -0.0101** (-2.386) -0.0135*** (-3.482) -0.0036 (-0.815) 0.0114*** (5.709) 3.3483*** (4.624) -0.0070*** (-12.588) -0.0239*** (-5.674) 0.0013 (1.412) -0.0011 (-0.595) 0.0014 (0.706) -0.0076 (-1.567) -0.0007** (-2.045)

Insider class B Insider class C Energy Materials Industrials Consumer Dis. Consumer Sta. Financials

-0.0181 (-1.101) IT -0.0028 (-0.260) Multiple trade -0.0054 (-0.882) Transaction size 0.3199 (1.523) Firm size 0.0009 (0.449) Momentum -0.0204 (-1.111) Book to market 0.0030 (0.561) Frequent trading 0.0012 (0.182) Previous buy -0.0014 (-0.282) Previous sell 0.0045 (0.297) Day gap 0.0005 (0.917) Legal change -0.0139 (-1.157) Constant -0.0202 (-0.467) Observations Adjusted R2 712 -0.006

0.1604*** (12.028) 8870 0.102

38

Table VII - Continued


Austria -0.0176* (-1.933) -0.0131 (-1.084) 0.0853* (1.706) 0.0460 (1.593) 0.0489** (1.986) 0.0211 (1.128) France 0.0006 (0.422) -0.0004 (-0.255) -0.0058 (-1.544) -0.0075* (-1.789) -0.0038 (-1.314) -0.0057* (-1.841) -0.0043 (-1.270) -0.0018 (-0.441) -0.0058* (-1.919) -0.0013 (-0.847) 0.0020 (0.095) -0.0002 (-0.349) -0.0147*** (-3.180) 0.0014 (0.752) -0.0003 (-0.192) -0.0037 (-1.274) -0.0016 (-1.212) -0.0004** (-2.254) -0.0091*** (-2.583) 0.0127 (1.183) 2253 0.016 Panel B: All Sales Germany Ireland 0.0026 -0.0036 (1.119) (-0.249) 0.0050** 0.0189 (2.224) (1.039) 0.0060 -0.0274 (1.074) (-1.591) 0.0011 -0.0295 (0.308) (-0.966) 0.0014 -0.0258 (0.382) (-1.067) 0.0041 -0.0282 (1.271) (-1.282) -0.0014 -0.0084 (-0.390) (-0.312) 0.0029 -0.0252 (0.914) (-1.080) 0.0035 (1.043) 0.0011 0.0247* (0.378) (1.710) 0.0455 0.1148 (1.032) (0.213) 0.0011** 0.0048 (2.289) (0.696) -0.0037 -0.0370 (-0.655) (-1.026) -0.0006 -0.0029 (-0.287) (-0.167) 0.0013 0.0064 (0.694) (0.539) 0.0033 0.0276 (0.654) (0.789) -0.0043** 0.0031 (-2.212) (0.320) -0.0005** -0.0011 (-2.268) (-0.458) -0.0012 (-0.258) -0.0179* -0.1252 (-1.649) (-0.877) 2691 0.010 69 -0.096 Italy -0.0004 (-0.223) 0.0024 (0.869) -0.0000 (-0.001) 0.0009 (0.193) 0.0002 (0.070) -0.0042 (-1.007) 0.0027 (0.561) -0.0012 (-0.376) -0.0021 (-0.554) 0.0021 (1.177) -0.0072 (-0.332) -0.0008 (-1.207) -0.0188** (-2.520) 0.0026 (1.409) 0.0047** (2.406) 0.0010 (0.303) -0.0035 (-1.374) 0.0005* (1.854) 0.0004 (0.057) 0.0130 (0.867) 2101 0.017 Netherl. 0.0029 (0.939) 0.0022 (0.590) 0.0049 (0.499) -0.0064 (-0.604) -0.0034 (-0.402) -0.0032 (-0.386) -0.0058 (-0.734) -0.0037 (-0.422) -0.0007 (-0.082) 0.0019 (0.586) -0.0094 (-0.084) 0.0020** (1.992) -0.0101 (-0.855) 0.0001 (0.020) -0.0091** (-2.278) -0.0001 (-0.012) -0.0019 (-0.537) 0.0003 (0.540) -0.0061 (-1.020) -0.0366 (-1.453) 571 0.024 Sweden 0.0020 (0.980) 0.0018 (0.822) 0.0049 (0.871) -0.0015 (-0.273) -0.0030 (-1.227) -0.0034 (-1.232) 0.0075* (1.679) -0.0013 (-0.530) -0.0034 (-1.297) -0.0006 (-0.442) 0.0551 (1.371) 0.0003 (0.856) -0.0095** (-2.241) -0.0002 (-0.343) 0.0025 (1.604) 0.0003 (0.149) -0.0008 (-0.555) 0.0000 (0.057) 0.0032 (1.335) -0.0114 (-1.317) 3605 0.011 U.K. 0.0014 (0.998) -0.0009 (-0.531) -0.0103*** (-2.905) -0.0134*** (-3.041) -0.0130*** (-4.167) -0.0107*** (-3.280) -0.0076** (-2.180) -0.0128*** (-4.073) -0.0126*** (-3.886) -0.0021 (-1.240) 0.0496 (0.664) -0.0000 (-0.003) -0.0168*** (-3.928) 0.0014 (0.924) 0.0014 (0.951) 0.0023 (0.942) 0.0001 (0.094) -0.0004 (-1.458)

Insider class B Insider class C Energy Materials Industrials Consumer Dis. Consumer Sta. Financials IT Multiple trade Transaction size Firm size Momentum Book to market Frequent trading Previous buy Previous sell Day gap Legal change Constant

0.0771** (2.140) -0.0099 (-0.361) -0.0144 (-1.150) -0.0658 (-0.249) -0.0213 (-1.598) -0.0873* (-1.771) 0.0188 (1.154) -0.0103 (-0.864) 0.0060 (0.308) 0.0084 (0.695) -0.0033** (-2.372) 0.0034 (0.277) 0.4385* (1.653) 238 0.108

0.0112 (1.288) 2498 0.024

Observations Adjusted R
2

39

Table VIII Cumulative Abnormal Returns for European Insider Trades by Industry Sectors
This table reports the CAARs for directors trades between 01/2003 and 12/2009 for eight European countries. Sector categorization is provided by COMPUSTAT. t-statistic is the lowest absolute value of all four test statistics applied for each CAAR and Observation (tCAAR, trank, J1, J2). All CAARs have been computed in an event-study framework as proposed by MacKinlay (1997). An estimation window of 180 trading days and an observation window of 41 days centered on the announcement day have been used. The market return is approximated by the corresponding (Gross) MSCI Barra Performance Share Index for each single country. All Transactions Sector N Energy Purchases CAAR t-statistic Sales CAAR t-statistic Purchases CAAR t-statistic Sales CAAR t-statistic Purchases CAAR t-statistic Sales CAAR t-statistic Purchases CAAR t-statistic Sales CAAR t-statistic Purchases CAAR t-statistic Sales CAAR t-statistic Purchases CAAR t-statistic Sales CAAR t-statistic Purchases CAAR t-statistic Sales CAAR t-statistic Purchases CAAR t-statistic Sales CAAR t-statistic 927 1.11% 4.07 464 -0.24% -1.83 1851 0.44% 1.98 596 -0.38% -1.83 7146 0.76% 4.30 3106 -0.37% -3.63 5706 0.60% 5.53 2419 -0.39% -2.72 1214 0.57% 3.50 608 -0.10% -0.87 1607 1.86% 6.12 950 -0.19% -1.30 7118 0.51% 4.86 2803 -0.25% -2.56 4900 1.10% 6.54 3034 -0.45% -3.31 -1.12% -4.11 1.67% 5.72 -3.41% -5.65 1.60% 6.11 -2.83% -5.03 3.14% 6.90 -0.48% -3.11 1.35% 5.62 -2.25% -4.43 0.81% 4.98 -2.68% -7.70 1.61% 4.02 -0.50% -1.26 3.20% 5.29 -1.49% -0.91 2.56% 6.38 -2.14% -2.18 4.03% 6.69 -0.40% -1.44 1.05% 2.29 -1.51% -0.99 0.71% 2.95 -2.78% -2.79 1.54% 2.89 -0.63% -3.30 2.58% 7.62 -2.26% -5.59 0.92% 5.94 -2.99% -7.19 1.57% 4.67 -0.64% -3.27 1.77% 7.02 -2.13% -4.58 1.30% 5.24 -3.40% -7.35 1.98% 4.59 -0.50% -1.01 1.64% 2.51 -0.60% -0.30 0.84% 2.83 -3.45% -6.28 1.03% 2.13 -0.47% -1.01 1.33% 2.51 -1.23% -0.30 1.56% 3.17 -2.67% -4.03 3.92% 4.80 CAAR (0;1) CAAR (0;4) CAAR (-20;-1) CAAR (0;20)

Materials

Industrials

Consumer Discretionary

Consumer Staples

Health Care

Financials

IT

40

Table IX Market Reaction to European Insider Trades


This table shows multivariate OLS regressions with CAAR(0;1) as the dependent variable. Insiders are categorized in three groups (for detailed categorization see Table V): Insider class A (top-level executives), Insider class B (mid-level executives), and Insider class C (low-level and non-executives). Insider class A is the base category. Sector dummy variables are categorized as follows: Healthcare, Energy, Industrials, Consumer Discretionary, Consumer Staples, Financials, IT. Healthcare is the base category. Multiple trade is set to one if more than one insider of a company trades on the same day. Transaction size is the relative size of a transaction based on the shares outstanding on the trading day. Firm size is calculated as the natural logarithm of the shares outstanding multiplied by the closing price of the underlying share on the trading day. Momentum measures the performance of shares 100 trading days prior to the transaction day. Book to market is the book to market value at the beginning of the year when the transaction took place. Frequent trading is set to one if the average trade frequency in the respective firm is higher than the average trade frequency of all firms in the respective country. Previous buy (Previous sell) is set to one if there has been at least one purchase (sale) announcement 20 days before the respective announcement, and zero otherwise. Day gap is the difference (in business days) between trade and announcement day. Legal change, is set to one if the transaction has been performed after the implementation of the Market Abuse Directive 2003/6/EC, and zero otherwise. All models include country (which are all significant at the 1% level except for Ireland) and year dummies. Standard errors are adjusted for heteroscedasticity and t-statistics are reported in parentheses. *,**,*** indicate significance at the 10, 5, and 1% level, respectively All Purchases -0.000792 (-0.900) -0.000421 (-0.542) -1.54e-05 (-0.00645) -0.00621*** (-3.065) -0.00549*** (-3.175) -0.00780*** (-4.601) -0.00830*** (-4.249) -0.00493*** (-2.952) -0.00410** (-2.294) 0.00712*** (7.878) 0.228*** (3.630) -0.00322*** (-15.77) -0.0187*** (-8.274) 0.00151** (2.354) -0.00196*** (-2.585) 0.00119 (1.579) -0.00240* (-1.746) -0.000190** (-2.227) 0.00292** (2.207) 0.0799*** (14.51) 30878 0.053 All Sales 0.000439 (0.503) 0.000673 (0.734) -0.00171 (-0.988) -0.00259 (-1.210) -0.00267** (-2.010) -0.00276* (-1.926) -4.66e-05 (-0.0297) -0.00176 (-1.239) -0.00283** (-2.030) -0.000144 (-0.167) 0.0349 (1.399) 0.000167 (0.728) -0.0110*** (-4.160) -8.31e-05 (-0.136) 0.00170** (2.270) 0.00111 (0.843) -0.00166** (-2.070) -0.000272** (-2.562) -2.66e-05 (-0.0195) 0.00198 (0.356) 14029 0.009

Insider class B Insider class C Energy Materials Industrials Consumer Dis. Consumer Sta. Financials IT Multiple trade Transaction size Firm size Momentum Book to market Frequent trading Previous buy Previous sell Day gap Legal Change Constant Observations Adjusted R
2

41