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Market Efficiency and Insider Trading: New Evidence

Michael S. Rozeff and Mir A. Zaman
The Journal of Business
Vol. 61, No. 1 (Jan., 1988), pp. 25-44
Stable URL: http://www.jstor.org/stable/2352978
Page Count: 20
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Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
Market Efficiency and Insider Trading: New Evidence
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Abstract

That corporate insiders earn profits from stock trading does not surprise most financial economists, but that outsiders can earn abnormal returns by using publicly available insider trading data constitutes a serious exception to stock market efficiency. We show that this anonally continues to exist despite the publication of studies attesting to its existence. We suggest that the anomalous profits to outsiders are a manifestation of the size and earnings/price ratio effects. Controlling for these factors reduces outsider profits by half; the additional assumption of a 2% transactions cost makes outsider profits zero or negative. Insider profits from trading in shares of their companies are also greatly reduced. Insider profits after an assumed 2% transactions cost are a moderate 3% per annum for annual holding periods.

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