Proceedings of 30th International Business Research Conference
20 - 22 April 2015, Flora Grand Hotel, Dubai, UAE, ISBN: 978-1-922069-74-0
Information Asymmetry and Information Content of Insider
Trades: Evidence from Indian Stock Market
Yogesh Kumar Chauhan, K. Kiran Kumar and Chakrapani C.
A large body of research documents that insider trading produces private information into
stock prices. Surprisingly, despite this large body of work, there is very less systematic
evidence whether information asymmetry due to firms' characteristics explains the crosssectional differences in the information content of insider trading. In this study, we report
the cross-sectional variation in information production by insider trading using a proprietary
data set of an emerging market, India, where a concentrated ownership structure tends to
exhibit the self-dealing behaviour at the expense of minority shareholders. These firms
therefore reveal less firm-specific information to camouflage controlling shareholders'
behaviour, which is expected to aggravate the degree of information asymmetry between
insiders and outsiders. In addition, we postulate that the degree of information asymmetry
between insiders and outsiders traders become more essential when there is a significant
variance in outside investors' capability to process information.
Our choice of firms’ characteristics to explicate the information content of insider trading is
based on the Kyle’s model of informed trading. This model postulates that there is an
inherited information asymmetry between insiders and outsiders. Therefore, whenever
insiders trade their own firms' stock, their trades incorporate private information into stock
prices. Since the degree of information asymmetry cannot be measured directly in the
archival market, we consider various variables that may influence a firm's information
environment.
These variables are institutional ownership, controlling shareholders
ownership, price to book ratio, firm size, and the percentage of independent directors, stock
volatility, price informativeness, firm age, firm leverage, and product market competition.
Furthermore, we account Indian firms' differences related to business group. Since
compared to standalone firms, group structures through their complex cross holdings and
control rights leave less room for the managerial control to affiliated firms, the information
dissemination process of group affiliated firms ought to be dissimilar from standalone firms.
The study analyzes a propriety dataset of insider trades in Indian market obtained from
National Stock Exchange that contains all purchases and sales made by insiders from Jan
1, 2007 to October 31, 2012. The proprietary data provides information about firm name,
individual insider name and his capacity in firm, mode of transaction (market, employee
option and gift etc.), type of trade (purchase or sale), number of shares traded and the date
of intimation to company and the date of announcement to the stock exchange. Further
firm level data is obtained from Prowess, a database maintained by the Centre for
Monitoring Indian Economy (CMIE).
Consistent with previous research, in our empirics, we find that insider trading
communicates private information for stocks listed on the National Stock Exchange. This
finding is consistent with the view that in an emerging market, with poor analysts following
and press independence, insider trading becomes the credible source of information
production. Related to cross-sectional variation of insider trading, we find that the
information content is positively related to the degree of information asymmetry and it
depends on structural irregularities in the product market and organizational form of firms in
the economy.
Field of Research: Finance
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Yogesh Kumar Chauhan, ICFAI, Hyderabad
K Kiran Kumar, Indian Institute of Management, Indore, kirankumar@iimidr.ac.in
Chakrapani C, IMT Hyderabad