This paper examines the insider trading activity in Malaysia. It tries to examine the existence of the abnormal profit from this activity. While developed countries like

United States and United Kingdom recently reported that the activity can no longer gives abnormal profit for long period due to laws imposed in those countries, attention

now turns to emerging market like Malaysia. By using event study analysis, 200 cases of insider trading activity reported between January 2008 and March 2009 were closely examine and the result shows that while abnormal return do exist, it is mostly not significant. This paper also looks at the individuals and institutional insider and their performances respectively

Ahmad Fawwaz, Mohd Nasarudin

English

Universiti Utara Malaysia: UUM eTheses

ATH DissertatioMastE ANNOUAHMAn Submitteder of SciencNCEMENTD FAWWA in Partial Fe in Finance Univer    EFFECTS   by    Z BIN MO80O728     ulfillment o at the Gradsiti Utara M    OF INSIDEHD NASARf the Requiruate Schoolalaysia R TRADINUDIN ements for t of ManagemG he Degree oent, f DECLARATION  I hereby declare that the project paper is based on my original work except for quotations and citations that have been duly acknowledge. I also declare it has not been previously or concurrently submitted for any other Master’s programme at Universiti Utara Malaysia or other institutions.    _____________________________________________ AHMAD FAWWAZ BIN MOHD NASARUDIN Date: 1 NOVEMBER 2009               PERMISSION TO USE  In presenting this dissertation as a partial fulfillment of the requirements for a postgraduate degree from Universiti Utara Malaysia, I agree that the university’s library may take it freely available for inspection. I further agree that permission for copying of this dissertation in any manner, in whole or in part, for scholarly purposes may be granted by my supervisor or in other absence by the Dean, Postgraduate Studies, and College of Business. It is understood that any copying or publication or use of this dissertation or parts thereof for financial gain shall not be allowed without my written permission. It is also understood that due to recognition shall be given to me and to Universiti Utara Malaysia for any scholarly use which may be made of any material from my dissertation.   Request for permission to copy or to make other use of materials in this dissertation, in whole or in parts should be addressed to:   Dean, Postgraduate Studies College of Business Universiti Utara Malaysia O6100 Sintok Kedah Darul Aman    ABSTRACT  This paper examines the insider trading activity in Malaysia. It tries to examine the existence of the abnormal profit from this activity. While developed countries like United States and United Kingdom recently reported that the activity can no longer gives abnormal profit for long period due to laws imposed in those countries, attention now turns to emerging market like Malaysia. By using event study analysis, 200 cases of insider trading activity reported between January 2008 and March 2009 were closely examine and the result shows that while abnormal return do exist, it is mostly not significant. This paper also looks at the individuals and institutional insider and their performances respectively.  Keyword: Insider trading; Event study          ACKNOWLEDGEMENT  In the name of Allah, the most Gracious and the most Merciful. All my praises and gratitude to Allah, for His kindness and for meeting me with many wonderful people who, with His Grace, have had helped me tremendously in the successful completion of this research.  This research would not have been possible without the constructive comments, suggestion and encouragement received from my supervisor who has read the various draft. My special thanks and appreciation to my dedicated advisor, Dr. Kamarun Nisham Taufil Mohd for the advices, guidelines, criticism and suggestions.   I would also like to thank my parents, who have been a continuous source of inspiration and encouragement. Thanks for giving a great support throughout the duration of my studies and unceasing prayers for my success.  In addition, thanks to all my friends that helped, support and provided insight and useful ideas, constructive comments, criticism and suggestion throughout the duration of completing this research.   Thank you.   TABLE OF CONTENTS  DECLARATION PERMISSION TO USE ABSTRACT          i ACKNOWLEDGEMENT        ii TABLE OF CONTENTS        iii LIST OF TABLES         vi LIST OF FIGURES         vii LIST OF ABBREVIATIONS       viii  CHAPTER 1: BACKGROUND OF STUDY 1.1 Introduction        1 1.2 Problem Statement       2 1.3 Research Objective       3 1.4 Significance of the Study      3 1.5 Conclusion        4  CHAPTER 2: LITERATURE REVIEW  2.1 Introduction        5  2.2 Literature Review       5 2.2.1 Insider Trading      7 2.2.2 Regulations of Insider Trading    10 2.2.3 Abnormal Returns      15  2.3 Conclusion        17  CHAPTER 3: RESEARCH METHOD  3.1 Introduction        18  3.2 Data Collection       18  3.3 Methodology        20   3.3.1 Market model       21   3.3.2 Market Adjusted ReturnModel    23   3.3.3 Test for individuals and institutions     25  3.4 Conclusion        25  CHAPTER 4: ANALYSIS AND FINDINGS  4.1 Introduction        26  4.2 Result from Market Model Analysis     27 4.3 Result from Market Adjusted Return Analysis   31  4.4 Test for Individuals and Institutions     34  4.5 Conclusion        37  CHAPTER 5: CONCLUSION AND RECOMMENDATION 5.1 Introduction        38 5.2 Overview of the Research Process     38 5.3 Summary of Findings       40 5.4 Implications of the Study      40 5.5 Direction for Further Studies      41 5.6 Conclusion        41  REFERENCES         42 APPENDICES                    LIST OF TABLES  Table 4.1 : Average abnormal return for insider purchases and sales  Table 4.2 : Cumulative daily abnormal returns for insider trading events Table 4.3 : Average daily abnormal return for insider trading events using market                          adjusted Table 4.4  : Cumulative daily abnormal returns for insider trading events using market       adjusted Table 4.5 : Mean test and t-test for individuals and institutional selling activity Table 4.6 : Results for parametric and non-parametric test for sales activity Table 4.7 : Mean and t-test for individuals and institutional purchasing activity Table 4.8 : Results for parametric and non-parametric for purchasing activity             LIST OF FIGURES  Figure 4.1 :  The cumulative average abnormal return for selling activity using market model  Figure 4.2 : The cumulative average abnormal return for purchasing activity using market model  Figure 4.3 :  The cumulative average abnormal return for selling activity using market adjusted return  Figure 4.4 :  The cumulative average abnormal return for purchasing activity using market adjusted return            LIST OF ABBREVIATIONS  CAAR  : Cumulative abnormal returns CMSA  : Capital Market and Service Act  EMH  : Efficient market hypothesis  ITSA  : Insider Trading Sanctions Act  SIA  : Malaysian Securities Industry Act SICDA  : Securities Industry (Central Depositories) Act                  1  CHAPTER ONE  BACKGROUND OF STUDY   1.1  INTRODUCTION   The efficient-market hypothesis asserts that financial markets are "informationally efficient" in which prices on traded assets will reflect all known information, and instantly change to reflect new information. Therefore, according to theory, it is impossible to consistently outperform the market by using any information that the market already knows.  When the market is said to be strong, it indicates no individual can have higher expected trading profits than others because of monopolistic access to information. However this conclusion does not hold in the existence of insider trading.   Insider trading is an activity of trading corporation’s stock or any other securities by individuals with potential access to non-public information about the company. The study on insider trading can be categorized into two broad areas. The first area of studies emphasis on insider trading regulation and their reaction to its enforcement. The second topic on insider trading which also attracts reviewer is regarding the profit of the insider.   The contents of the thesis is for internal user only 42  REFERENCES   Ahmet Kara, Karen Craft Denning (1998), “A model and empirical test of the strong form efficiency of US capital markets: More evidence of insider trading profitability”, Applied Financial Economics.  Cheuk, M.Y, Dennis K. Fan, Raymond W. So (2006), “Insider trading in Hong Kong: Some stylized facts”, Pacific-Basin Finance Journal 14 (2006) 73– 90  Eckbo, B.E., Smith, D.C., (1998), “The conditional performance of insider trades”, Journal of Finance 53, 467–498.  Fama, E., French, K., (1992),“The cross-section of expected returns.” Journal of Finance 47, 427– 466.  Fama, E., French, K., (1995), “Size and book-to-market factors in earnings and returns. Journal of Finance 50”, 131–155.  Finnerty, J., (1976), “Insiders and market efficiency.” Journal of Finance 31, 1141– 1148.  Grinblatt, M., Keloharju, M.(2001), “What makes investors trade?” Journal of Finance 56, 589–616. 43   Jaffe, J.F., (1974), “Special information and insider trading”,  Journal of Business 47, 410–428.  Jeng, L., Metrick, A., Zeckhauser, R., (2003),“ Estimating the returns to insider trading: a performance-evaluation perspective”, Review of Economics and Statistics 85, 453–471.  Joseph D. Beams, Robert M. Brown and Larry N. Killough (2003), “An Experiment Testing the Determinants of Non-Compliance with Insider Trading Laws”, Journal of Business Ethics 45, pp 309-323, 2003.  Juha-Pekka Kallunki, Henrik Nilsson and Jorgen Hellstrom (2009), “Why do insiders trade? Evidence based on unique data on Swedish insiders”, Journal of Accounting and Economics.  Lakonishok, J., Lee, I., (2001) “Are insider trades informative?”, Review of Financial Studies 14, 79–111.  Lin, J., Howe, J., (1990), “Insider trading in the OTC market”,  Journal of Finance 45, 1273–1284.  Louis Cheng, Michael Firth, T.Y. Leung and Oliver Rui (2006), “The effects of insider trading on liquidity”, Pacific-Basin Finance Journal 14 (2006) 467–483 44  Nasser Arshadi (1998), “Insider Trading Liability and Enforcement Strategy”, Financial Management, Vol. 27, No. 2, Summer 1998, pages 70 – 84.  Philip Anthony Ohara (2001), “Insider trading in financial market”, International Journal of Social Economics Vol. 28, pp 1046-1062.  Pope, P.F., Morris, R.C., Peel, D.A., (1990), “ Insider trading: some evidence on market efficiency and director’ share dealings in Great Britain”, Journal of Business, Finance, and Accounting 17, 359–380.  Rozeff, M., Zaman, M., (1988), “ Market efficiency and insider trading: new evidence” Journal of Business 61,25–44  Seyhun, N., (1988), “The information content of aggregate insider trading”, Journal of Business 61, 1– 23.  

The Announcement Effects of Insider Trading

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The Announcement Effects of Insider Trading

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