Insider trading on the Stockholm Stock Exchange: Non reported insider trading prior to profit warnings

There is a general assumption that insider trading is something that must be prohibited in order to protect the generel publics confidence in the stock market

Background: Studying insider trading is difficult due to its sensitive and delicate nature. Therefore it is hard to gauge the extent of such activities.This problem has resulted in a fierce debate whether it should be prohibited or not. Using a method where the effect on monopolistic information usage can be isolated insider trading can be monitored.Such an event is a profit warning.

Purpose: This paper examines whether insider trading exist for companies making a profit warning between year 2003 and 2007 on the Stockholm Stock Exchange. Furthermore the aim with the study is to contribute to the debate on the insider trading legislation…


1 Introduction
1.1 Background
1.2 Problem
1.3 Purpose
1.4 Research questions
1.5 Delimitations
1.6 Literature search
2 Frame of reference
2.1 Insider trading
2.1.1 Illegal insider trading
2.1.2 Controversy surrounding insider trading
2.2 Efficient market hypothesis
2.2.1 Assumptions of the EMH
2.2.2 Forms of efficiency
2.3 Price drift
2.4 Profit warnings
2.5 Event study
2.5.1 Steps in an event study
2.6 Expected return estimation
2.6.1 Economic models
2.6.2 Statistical models
3 Method
3.1 Quantitative vs. qualitative approach
3.2 Conducting our study
3.2.1 Event study specification
3.2.2 Data gathering
3.2.3 Beta and abnormal return estimations
3.2.4 Statistical testing
3.3 Validity and reliability
3.3.1 Validity
3.3.2 Reliability
3.4 Criticism of sources and method
4 Empirical results and analysis
4.1 Initial remarks
4.2 Descriptive results and analysis
4.3 Statistical testing
4.4 Insider trading law effectiveness
5 Conclusion
6 Discussion
6.1 Profit warning impact on stock prices
6.2 Insider trading pattern and possible differences
6.3 Recommendations for further research

Author: Lindén, Patrik,Lejdelin, Martin

Source: Jönköping University

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