INSIDER TRADING AND MARKET EFFICIENCY IN SINGAPORE

Abstract

Insider trading has been found to yield abnormal profits in many overseas studies, leading to the rejection of the Efficient Market Hypothesis in its strong form. A similar study has not been conducted in the local stock market. This Academic Exercise is thus motivated to examine insider trading profits and its implication on strong form market efficiency in the Singapore stock market. Furthermore, published insider trading data is also employed to determine the profitability of trading strategies that mimic the insider transactions. This is the test of the semi-strong form market efficiency. This study used the transaction data of insiders as recorded in the SES Financial New Daily from 1985 to 1986. At the broad level, the strong form test of market efficiency was performed using all the insiders transactions. As this sample of transactions may include trades that were based on liquidity rather than information, a second sample of large transactions was formed to eliminate the noise from the liquidity-based transactions. The study also focused on the performance of directors and non-directors in their share dealings. Assuming that insiders can made abnormal returns, it may be possible for the outsiders to share this profits by adopting the following strategies: follow all the transactions of the insiders, mimic the large insider transactions and imitating the director trades. The semi-strong form test examined the profitability of such trading strategies that emulate the insider transactions. The event-study methodology was used in our tests. The results obtained showed that the local market is not strong form efficient. Purchases by directors and large transactions by insiders were found to yield abnormal profits. The semi-strong form test indicates market efficiency with respect to public information of aggregate insider transactions and director trades,but market inefficiency with respect to public information on large insider trades. The abnormal profits found to be present in large insider buy transactions and director buy transactions may indicate the possibility of information exploitation. Furthermore, a trading strategy of following the large insiders transactions may be use by the outsiders to make abnormal profits.