Description
The purpose of this paper is to investigate the extent of directors breaching the reporting
requirements of the Australian Stock Exchange (ASX) and the Corporations Act in Australia. Further,
it seeks to assess whether directors in Australia achieve abnormal returns from trades in their own
companies.
Accounting Research Journal
The equity and efficiency of the Australian share market with respect to director
trading
Katherine Uylangco Steve Easton Robert Faff
Article information:
To cite this document:
Katherine Uylangco Steve Easton Robert Faff, (2010),"The equity and efficiency of the Australian share
market with respect to director trading", Accounting Research J ournal, Vol. 23 Iss 1 pp. 5 - 19
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The equity and ef?ciency
of the Australian share market
with respect to director trading
Katherine Uylangco and Steve Easton
University of Newcastle, Newcastle, Australia, and
Robert Faff
UQ Business School, University of Queensland, Brisbane, Australia
Abstract
Purpose – The purpose of this paper is to investigate the extent of directors breaching the reporting
requirements of the Australian Stock Exchange (ASX) and the Corporations Act in Australia. Further,
it seeks to assess whether directors in Australia achieve abnormal returns from trades in their own
companies.
Design/methodology/approach – Using an event study approach on an Australian sample,
abnormal returns for a range of situations were estimated.
Findings – A total of 13 (seven) per cent of own-company directors trades do not meet the ASX
(Corporations Act) requirement of reporting within ?ve (14) business days. Directors do achieve
abnormal returns through trading in shares of their own companies. Ignoring transaction costs,
outsiders can achieve abnormal returns by imitating directors’ trades. Analysis of returns to directors
after they trade but before they announce the trade to the market shows that directors are making
small but statistically signi?cant returns that are not available to the market. Analysis of returns to
directors subsequent to the ASX reporting requirement up to the day the trade is reported shows that
directors are making small but statistically signi?cant returns that should be available to the market.
Research limitations/implications – Future research should investigate the linkages between late
reporting by directors and disadvantages to outside shareholders and the implementation of internal
policies implemented to mitigate insider trading.
Practical implications – Market participants should remain vigilant regarding the potential for
late/non-reporting of directors’ trades.
Originality/value – Uncoveringbreaches of reportingregulations are particularlyimportant giventhat
directors tend to purchase (sell) shares when the price is low (high), thereby achieving abnormal returns.
Keywords Directors, Shares, Financial reporting, Australia
Paper type Research paper
1. Introduction
Recent media releases and reports from investment ?rms have highlighted that many
directors fail to meet the requirements of the Australian Stock Exchange (ASX) to
report their trades within ?ve business days of the transactions[1]. These reports also
document that some directors are in breach of the Corporations Act, which requires
them to report to the market within 14 days (herein referred to as ten business days).
With corporate governance being given greater focus in Australia and overseas, there
is a need for the extent of late reporting to be closely examined.
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1030-9616.htm
The authors wish to thank Jim Psaros and two anonymous referees for helpful comments.
Funding for the project was provided by the Melbourne Centre for Financial Studies.
Australian
share market
5
Accounting Research Journal
Vol. 23 No. 1, 2010
pp. 5-19
qEmerald Group Publishing Limited
1030-9616
DOI 10.1108/10309611011060506
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Brown et al. (2003) report that Australian directors on average achieve abnormal
returns from trading in shares of their own companies. The current paper extends upon
the Brown et al. evidence. We also examine the feasibility of imitators achieving
abnormal return from a trading strategy of buying (selling) shares when directors
report buying (selling) activity in their own stock. Such analysis has been undertaken
for the US market by Seyhun (1986), but is absent in Australia.
The motivation and contribution of the paper is therefore threefold. First, the paper
provides the ?rst academic research into the extent of late reporting by directors in
Australia. Second, it provides an examination of the abnormal returns earned by
imitators froma trading strategy of buying (selling) shares when directors report buying
(selling) activity in their own stock. Third, an analysis is undertaken to determine
whether directors are able to earn abnormal returns over the period between their
trading in shares and the subsequent reporting of those trades. This ?nal arm of our
investigation is extended by providing an analysis to determine whether directors’ late
reporting increases the abnormal returns directors are able to earn that are not available
to other investors. This approach has not been employed in previous studies. Notably,
it shows that returns are being missed by outside investors due to late reporting[2].
The paper is organised as follows. Section 2 describes the relevant literature,
Section 3 provides a discussion of the methodology, Section 4 examines the data
collection and the results are presented in Section 5. Section 6 provides a summary.
2. Literature review
Discussion regarding the late reporting of trading by directors in their own company
shares in Australia has largely been con?ned to the media. This includes a report by
BT Financial Group’s (2005) “Position paper – director and executive share trading”
released 11 November, examining all trades by directors in 2004 and a media release by
the ASX on 27 June 2008 reporting on whether trades by directors over the three
months to 31 March 2008 were reported to the ASX on time and in accordance with the
Corporations Act. In the UK, Balmforth et al. (2007) found that 14 per cent of all trades
by company directors in the UK were reported late. In Australia, Chang and Meynert
(2009) use year-end director shareholdings to estimate that over the period from 2002 to
2007, 45 per cent of directors failed to report at least one trade in any given year.
The most comprehensive study of director trades in Australia following the
mandatory reporting of such trades is by Brown et al. (2003). This study hypothesises
that directors behave as contrarian investors, using inside information to buy
shares when they are underpriced and to sell shares when they are overpriced. Major
?ndings by Brown et al. (2003) are that directors achieve abnormal returns from sales
(particularly for resource companies) in that byselling theyavoid future losses; however,
the purchases do not capture future abnormal price rises. They do not ?nd any bias due
to the size of the company or the size of trade.
Additional Australian studies demonstrate that directors are trading on inside
information, that at least some of these trades achieve abnormal returns and that some
strategies could provide abnormal returns to an imitator. Chang and Chopra (2007)
conclude that Australian director trades contain industry information and an imitator
can avoid losses by investing in the relevant industry following a trade by a director.
Freeman and Adams (1999) examine the extent of insider trading in Australia, prior
to the introduction of reporting requirements by the ASX, based on a survey of
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company directors. Freeman and Adams (1999, p. 1) report that “a signi?cant
proportion of directors indicated a propensity to time their trades based on inside
information”. Watson and Young (1998) show that insider trading occurs at the time
surrounding takeover announcements in Australia. Hotson et al. (2007) also show that
directors and imitators pro?t from trades in small companies.
Internationally, the most comprehensive study of director trading was undertaken by
Seyhun (1986) using US data. He ?nds that directors achieve abnormal returns from
both sales and purchases of shares in their own companies. However, he shows that
imitators could not achieve abnormal returns using a trading strategy that mimics the
behaviour of the directors. He also shows that those who are expected to know more
about the overall affairs of the ?rm, such as chairmen of the boards of directors or
of?cer-directors, make better trades than of?cers or share holders alone. In addition,
he concludes that insiders knowon which inside information to rely and can exploit this
information by adjusting the volume of trading. He also shows that the size of the
company is important and that ignoring greater transaction costs for smaller companies
may result in an overstatement of abnormal returns achieved by smaller companies.
Several international studies have analysed insider trading abnormal returns
available to directors of different sized companies. Seyhun (1986) and Lakonishok and
Lee (2001) show that abnormal returns are achieved by insiders for purchases of shares
in small companies. Gregory et al. (1994) also demonstrate that UK directors can
achieve abnormal returns particularly in small companies. However, they show that
applying a benchmark that takes account of company size eliminates abnormal
returns. Brown et al. (2003) con?rm that company size does not impact the abnormal
returns in such trading activity. Given that the data available for the current study is
biased towards larger stocks (those in the All Ordinaries Index), we do not conduct
analyses conditioned on size.
International studies attempt to ?nd additional indicators for abnormal returns of
insider trades by directors. Baesel and Stein (1979) show that US directors earn
abnormal returns by trading in their own company’s shares, and that bank directors
achieve the largest abnormal returns. Friederich et al. (2002) show that medium sized
trades by UK directors can predict future returns, but that this trading strategy does
not result in abnormal returns. Hillier and Marshall (2002) ?nd that director’s trading
in unison can be a good indicator for future share prices.
A strong asymmetry in insider trading pro?ts is widely documented. Jeng et al.
(2003) ?nd that US directors earn 6 per cent p.a. abnormal returns by purchasing
shares of their own companies, but that no abnormal returns are achieved from the sale
of shares. Pope et al. (1990) ?nd that there appears to be a sharp market movement
around the time director’s trade in shares of their own company, particularly on the
sell side.
The length of time over which abnormal returns are achieved is also examined in
international studies. Friederich et al. (2002) show that UK directors achieve abnormal
returns from short-term trades. Ke et al. (2003) demonstrate that US directors trade on
accounting information up to two years prior to an event taking place, but that trading
does not generally occur in the two quarters immediately prior to the event. They
conclude that this is consistent with directors adhering to the antifraud provisions of
the Securities and Exchange Act 1934, especially Section 10(b), which is designed to
prevent insider trading. Lakonishok and Lee (2001) show very little market movement
Australian
share market
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surrounding US director trades at the time of the trade and at the time of reporting.
Pope et al. (1990) ?nd sharp market movement around the time directors trade in
shares of their own company.
There is still some debate about whether those attempting to imitate trades by
directors, purchasing (selling) shares when directors report that they have purchased
(sold) shares in their own company, can achieve abnormal returns. Gregory et al. (1997)
conclude that abnormal returns can be made by imitators when UK directors sell.
Lin and Howe (1990) show that in the USA, transaction costs eliminate pro?ts by both
inside traders and imitators.
3. Research method
This study uses the standard event study methodology to examine the abnormal returns
from director trades in the shares of their own company[3]. The ?rst section of analysis
examines the returns to directors fromtrading in shares of their own companies – day 0
is the day the trade takes place. The second section of analysis examines whether
abnormal returns could be earned by an imitator who trades based on when directors
trade – day 0 is the day the trade is reported to the market. The ?nal section of analysis
investigates the returns achieved by directors between the time they trade in shares of
their own company and the time the trade is reported to the market – day 0 is the day the
trade takes place, however, the returns are excluded from the analysis when the trade is
reported to the market. Cumulative abnormal returns are calculated using market model
estimates based on the All Ordinaries Accumulation Index from 250 days to 20 days
prior to the trade.
The pre-event period is ten business days prior to either the trade taking place or the
trade being reported to the market. The post-event period includes the day of the trade
taking place or the trade being reported and ten business days after either the trade taking
place or the trade being reported to the market.
4. Data
The sample of director trades is obtained from news releases of director’s interest from
the IRESS Market Technology Ltd (IRESS) database for the period from 1 January
2005 to 31 December 2007. Trades are only included in the sample where the trade and
the date of the trade was at the discretion of the director[4]. For this reason, director’
trades that resulted from dividend reinvestment schemes, the exercise of options, the
exercise of rights issues, or from employee share purchase plans, are excluded from the
analysis. These trades are obtained for the 473 companies that were included in the All
Ordinaries Index as on 1 January 2005.
As shown in Table I, the sample comprises 2,932 insider trades by directors: of
which 2,189 are purchases and 743 sales. The ASX requirement is that directors report
trades within ?ve business days. However, of the 2,932 trades, 376 or 13 per cent are
not reported within ?ve business days. Of the 2,189 (743) purchases (sales), 263 or
12 per cent (113 or 15 per cent) are not reported within ?ve business days. This ?nding
is consistent with that of the study by the ASX (as reported in a media release on
27 June 2008). The ASX reported that 538 (13 per cent) of the 4,137 notices of director
trades breached the ASX reporting requirements. BT Financial Group also released
a report in 2004 that stated that from its study 432 (15 per cent) of the 2,936 notices of
director trades breached the ASX requirement.
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The Corporations Law requirement is that directors report to the market within ten
business days of a trade in their own company. Figure 1 shows the length of time taken
to report trades by directors trading in their own company shares. Of the 2,932 trades,
212 or 7 per cent are not reported within ten business days. Of the 2,189 (743) purchases
(sales), 144 or 7 per cent (68 or 9 per cent) are not reported within ten business days.
This ?nding is also consistent with the ASX study, where 289 of the 4,137 notices
(7 per cent) breached the Corporations Act reporting requirements. The average
All trades Purchases Sales
Panel A: all companies
Number of trades 2,932 2,189 743
Length of time to report the trade
Within ?ve business days 2,556 1,926 630
Between ?ve and ten business days 164 119 45
More than ten business days 212 144 68
Panel B: large companies
Number of trades 996 732 264
Length of time to report the trade
Within ?ve business days 871 655 216
Between ?ve and ten business days 45 32 13
More than ten business days 80 39 31
Panel C: medium companies
Number of trades 1,107 780 327
Length of time to report the trade
Within ?ve business days 966 686 280
Between ?ve and ten business days 59 39 20
More than ten business days 82 55 27
Panel D: small companies
Number of trades 829 677 152
Length of time to report the trade
Within ?ve business days 721 587 134
Between ?ve and ten business days 61 49 12
More than ten business days 47 41 6
Panel E: trades 0 to 0.1 per cent outstanding shares
Number of trades 1,161 1,024 137
Length of time to report the trade
Within ?ve business days 1,001 895 106
Between ?ve and ten business days 59 52 7
More than ten business days 101 77 24
Panel F: trades 0.1 to 0.3 per cent outstanding shares
Number of trades 665 545 120
Length of time to report the trade
Within ?ve business days 592 495 97
Between ?ve and ten business days 30 24 6
More than ten business days 43 26 17
Panel G: trades .0.3 per cent outstanding shares
Number of trades 1,106 620 486
Length of time to report the trade
Within ?ve business days 965 538 427
Between ?ve and ten business days 76 44 32
More than ten business days 65 38 27
Table I.
Summary statistics
of director trades
Australian
share market
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(median) number of days to report is 16 (3) for all trades, 17 (3) for purchases and 15 (4)
for sales.
Table I also shows the number of trades and the time taken to report trades for
large, medium and small companies[5]. When purchases and sales are considered
together, no relationship between company size and timeliness of reporting is found.
For example, for each company-size category, 87 per cent of trades are reported within
?ve business days. However, for this sample the failure to report sales within ?ve
business days is particularly apparent for larger companies, with 18, 14 and 12 per cent
of director sales for large, medium and small companies, respectively, being reported
after ?ve business days.
When purchases and sales are consider together, there is also no relationship
between the size of the trade and timeliness of reporting. However, where the trade size
is small, only 77 per cent of sales are reported with ?ve business days, as compared
with 81 per cent for the medium sized trades and 88 per cent for the largest sized trades.
Information regarding the number of trades and the time taken to report trades for
resource companies and non-resource companies was also collected. When purchases
and sales are considered together, directors of resources companies more often report
trades within ?ve business days than do directors of non-resource companies. For
example, for resource companies, 92 per cent of trades are reported within ?ve business
days whereas for non-resource companies 87 per cent of trades are reported within ?ve
business days. This pattern is particularly apparent for sales with 8 per cent of trades
being reported after ?ve business days for resource companies and 16 per cent of
trades being reported after ?ve business days for non-resource companies.
These results show the extent of non-compliance with the ASX rules and with the
Australian legal requirements by directors required to report trades in their own
companies to the market. Approximately, 13 per cent (7 per cent) of all trades are not
reported to the ASX (market) within the speci?ed timeframe. Such late reporting by
directors con?rms the perceptionthat the market is not beinginformedina timelymanner.
Figure 1.
Length of time
to report trades
0
5
10
15
20
25
Number of days to report trades in own company shares
0 1 2 3 4 5 6 7 8 9 10 More
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5. Results
5.1 Returns for trades by directors in relation to the day of trade
Table II shows average abnormal returns before and after trades by directors in their
own-company shares. For this analysis and all analysis of returns associated with
director trades, where more than one director purchased (sold) shares on the same day,
only the trade that was reported ?rst was included in the analysis. This screen reduced
the sample of purchases (sales) from 2,189 (743) to 1,949 (632).
For the total sample, the cumulative abnormal return over the ten business days
prior to directors purchasing shares was 21.6 per cent and signi?cantly different from
zero at the 1 per cent level, while the cumulative abnormal return over the ten business
days following the trade was 0.4 per cent and signi?cantly different from zero at the
5 per cent level. Conversely, the cumulative abnormal return over the ten business days
prior to directors selling shares was 1.8 per cent and signi?cantly different from zero,
with the cumulative abnormal return over the ten business days following the trade
being 20.8 per cent and signi?cantly different from zero. These results demonstrate
that directors avoid losses of 0.8 per cent by selling shares in their own companies.
Table II also shows the average abnormal returns before and after directors trade in
their own-company shares categorised by the time taken to report the trade. It shows that
the results above are largely driven by directors reporting trades within ?ve business
Purchases Sales
Pre-trade Post-trade Pre-trade Post-trade
Panel A: all trades
Mean (%) 21.6 0.4 1.8 20.8
Number 1,949 1,949 632 632
P-value (%) 0 3 0 0
Panel B: trades reported within ?ve days
Mean (%) 21.7 0.4 2.1 20.8
Number 1,706 1,706 540 540
P-value (%) 0 3 0 1
Panel C: trades reported between ?ve and ten days
Mean (%) 20.9 0.8 0.2 22.1
Number 113 113 43 43
P-value (%) 22 25 91 1
Panel D: trades not reported within ten days
Mean (%) 21.4 20.1 0.4 20.1
Number 130 130 49 49
P-value (%) 24 93 76 90
Panel E: resource ?rms
Mean (%) 22.3 1.2 2.0 22.0
Number 178 178 56 56
P-value (%) 0 6 5 7
Panel F: non-resource ?rms
Mean (%) 21.6 0.3 1.8 20.8
Number 1,771 1,771 576 576
P-value (%) 0 8 0 0
Notes: Cumulative abnormal returns are based on market model estimates from an estimation
window (2250 to 220); cumulative abnormal returns are calculated from t 2 10 to t 2 1 then from t0
to t10; P-value is for a two-tailed test
Table II.
Abnormal returns before
and after director trades
in own-company shares
Australian
share market
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days of the trade taking place. The cumulative abnormal return over the ten business days
prior to purchases for this groupwas 21.7 per cent, while the cumulative abnormal return
over the ten business days following the trade was 0.4 per cent, both signi?cant (at the
1 and 5 per cent levels, respectively). Conversely, the cumulative abnormal return over the
ten business days prior to directors selling shares was 2.1 per cent and signi?cantly
different from zero, with the cumulative abnormal return over the ten business days
following the trade being 20.8 per cent and signi?cantly different from zero.
For trades reported between ?ve and ten business days after the trade, only the
cumulative abnormal return of 22.1 per cent over the ten business days following sales
was signi?cantly different from zero. For trades not reported within ten business days
none of the cumulative abnormal returns for purchases or sales are signi?cantly different
from zero. While the ?ndings of Chang and Meynert (2009) suggest that it is likely that
there is also considerable failure to report trades at all, the ?nding that abnormal returns
are associated with trades that are reported within a ?ve-day period is suggestive that
failure to report is not be associated with abnormal return performance.
For resource companies, the cumulative abnormal return over the ten business days
prior to directors purchasing shares was 22.3 per cent and signi?cantly different from
zero at the 1 per cent level, while the cumulative abnormal return over the ten business
days following the trade was 1.2 per cent and not signi?cantly different from zero.
Conversely, the cumulative abnormal return over the ten business days prior to directors
selling shares was 2.0 per cent and signi?cantly different fromzero at the 5 per cent level,
with the cumulative abnormal return over the ten business days following the trade
being 22.0 per cent and not signi?cantly different from zero.
Figure 2 shows a graphical representation of Table II. It shows the cumulative
abnormal daily returns for ten business days before and after purchases and sales by
company directors. The cumulative abnormal returns prior to a purchase are negative
Figure 2.
Abnormal returns ten
business days before and
after director trades in
own-company shares
–2.5
–2.0
–1.5
–1.0
–0.5
0.0
0.5
1.0
1.5
2.0
2.5
t–10 t–9 t–8 t–7 t–6 t–5 t–4 t–3 t–2 t–1 t0 t+1 t+2 t+3 t+4 t+5 t+6 t+7 t+8 t+9 t+10
Number of days before or after the trade
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and signi?cant, while the cumulative abnormal returns after the purchase are not
signi?cant. The signi?cant positive returns prior to a sale are followed by signi?cantly
negative returns after the sale.
The results reported in this section are broadly consistent with Brown et al. (2003) in
that prior to purchases companies experienced negative returns and prior to sales,
companies experienced positive returns. Following the purchases, there are slightly
positive returns and following the sales there are negative returns. The results for
resource companies do not support those of Brown et al. (2003) in that the purchase (sale)
of shares by directors of resource companies is not followed by positive (negative)
returns, we also do not ?nd that the abnormal returns following sales are statistically
signi?cant. This ?nding is also consistent with Pope et al. (1990) who conclude that
directors do make abnormal returns particularly in being able to avoid losses by selling
prior to share price falls.
5.2 Returns from a trading strategy from the day of reporting the trades
This section demonstrates a trading strategy for an outsider to imitate trades by
directors by purchasing (selling) shares when a director discloses to the market that
they have purchased (sold) shares. It examines the returns before and after purchases
and sales of company shares are reported.
Table III shows average abnormal returns to imitators before and after directors
report trades in their own-company shares. For the total sample, the cumulative
abnormal return over the ten business days prior to directors reporting purchasing
shares was 21.1 per cent and signi?cantly different from zero at the 1 per cent level,
while the cumulative abnormal return over the ten business days following the trade
being reported was 0.2 per cent and not signi?cantly different fromzero. Conversely, the
cumulative abnormal return over the ten business days prior to directors reporting
selling shares was 1.1 per cent and not signi?cantly different from zero, with the
cumulative abnormal return over the ten business days following the trade being
reported being 21.1 per cent and signi?cantly different fromzero. Results in Section 5.1
demonstrate that directors avoid losses of 0.8 per cent by selling shares in their own
companies. This section demonstrates that imitators could achieve an abnormal return
of 1.1 per cent by short-selling shares when directors report the sale of shares. As noted
by Seyhun (1986), while transaction costs will be heterogeneous across ?rmsize, trading
volume and trade size, it is likely that after allowing for such costs abnormal returns are
likely to be small.
Table III also shows that the overall results are largely driven by directors who
report trades within ?ve business days of the trade taking place. The cumulative
abnormal return over the ten business days prior to directors reporting purchasing
shares was 21.3 per cent and signi?cantly different from zero at the 1 per cent level,
while the cumulative abnormal return over the ten business days following the trade
being reported was 0.2 per cent and not signi?cantly different from zero. Conversely,
the cumulative abnormal return over the ten business days prior to directors reporting
selling shares was 1.3 per cent and signi?cantly different from zero, with the
cumulative abnormal return over the ten business days following the trade being
reported being 20.9 per cent and signi?cantly different from zero. For trades reported
between ?ve and ten business days after the trade, only the cumulative abnormal
return of 23.6 per cent over the ten business days following the sale being reported
Australian
share market
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was signi?cantly different from zero. For trades not reported within ten business days,
none of the cumulative abnormal returns for purchases or sales are signi?cantly
different from zero.
For resource companies, the cumulative abnormal return over the ten business days
prior to directors reporting purchasing shares was 21.7 per cent and signi?cantly
different fromzero at the 1 per cent level, while the cumulative abnormal return over the
ten business days following the trade being reported was 1.2 per cent and signi?cantly
different from zero at the 5 per cent level. Conversely, the cumulative abnormal return
over the ten business days prior to directors reporting selling shares was 1.5 per cent and
not signi?cantly different from zero, with the cumulative abnormal return over the ten
business days following the trade being reported being 22.2 per cent and signi?cantly
different fromzero at the 5 per cent level. This section demonstrates that imitators could
achieve an abnormal return of 1.2 per cent by purchasing shares when directors report
the purchase of shares and an abnormal return of 2.2 per cent by selling shares when
directors report the sale of shares.
Figure 3 shows a graphical representation of Table III. It shows the cumulative
abnormal daily returns for ten business days before and after the reporting of purchases
and sales by company directors. The cumulative abnormal returns prior to a purchase
being reported are negative and signi?cant. The cumulative abnormal returns after
Purchases Sales
Pre-trade Post-trade Pre-trade Post-trade
Panel A: all trades
Mean (%) 21.1 0.2 1.1 21.1
Number 1,949 1,949 632 632
P-value (%) 0 8 6 0
Panel B: trades reported within ?ve days
Mean (%) 21.3 0.2 1.3 20.9
Number 1,706 1,706 540 540
P-value (%) 0 28 1 0
Panel C: trades reported between ?ve and ten days
Mean (%) 20.7 0.6 21.3 23.6
Number 113 113 43 43
P-value (%) 29 25 19 0
Panel D: trades not reported within ten days
Mean (%) 1.5 0.9 0.7 21.1
Number 130 130 49 49
P-value (%) 20 33 18 12
Panel E: resource ?rms
Mean (%) 21.7 1.2 1.5 22.2
Number 178 178 56 56
P-value (%) 1 1 20 3
Panel F: non-resource ?rms
Mean (%) 21.2 0.2 1.6 21.2
Number 1,771 1,771 576 576
P-value (%) 0 22 1 0
Notes: Cumulative abnormal returns are based on market model estimates from an estimation
window (2250 to 220); cumulative abnormal returns are calculated from t 2 10 to t 2 1 then from
t0 to t10; P-value is for a two-tailed test
Table III.
Abnormal returns before
and after director
discloses trades in
own-company shares
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the purchase are not statistically signi?cant. The positive returns prior to a sale being
reported are followed by signi?cantly negative returns after the sale is reported.
However, there is some evidence that the peak in positive returns prior to sales and
negative returns prior to purchases occurs prior to the trades being reported.
5.3 Abnormal returns from trades by directors prior to reporting the trades
This section analyses returns to directors after they trade but before they announce the
trade to the market. Day zero is de?ned as the day the director trades in shares of their
own company. The reported abnormal returns are those from a portfolio that has an
equal weight in all shares from time zero to the day prior to the trade being reported[6].
For the full sample of purchases, the cumulative abnormal return after purchases but
before the reporting of the trade is not signi?cantly different from zero. This suggests
that directors do not earn abnormal returns after purchasing shares in their own
companies that is not available to the market due to the delay in reporting. However, the
cumulative abnormal return after sales but before the reporting of the sale, was small
(20.2 per cent) but signi?cantly less than zero. This suggests that directors are able to
avoid a small but statistically signi?cant price fall that may not be avoided by the
market due to the delay in reporting.
Table IValso shows that the overall results are largely driven by directors who report
trades within ?ve business days of the trade taking place. The cumulative abnormal
return after sales but before the reporting of the sale, was small (20.2 per cent) but
signi?cantly less than zero. For trades reported between ?ve and ten business days after
the trade, the cumulative abnormal return after sales but before the reporting of a sale
was 20.5 per cent and signi?cant at the 5 per cent level; however, for trades not reported
within ten business days, none of the cumulative abnormal return after purchases (sales)
but before the reporting of the purchase (sale) are signi?cantly different from zero.
Figure 3.
Abnormal returns ten
business days before and
after director discloses
trades in own-company
shares
–1.5
–1.0
–0.5
0.0
0.5
1.0
1.5
2.0
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t–10 t–9 t–8 t–7 t–6 t–5 t–4 t–3 t–2 t–1 t0 t+1 t+2 t+3 t+4 t+5 t+6 t+7 t+8 t+9 t+10
Number of days before or after the trade
Purchases Sales
Australian
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For resource companies, the cumulative abnormal return after purchases (sales) but
before the reporting of the purchase (sale) are not signi?cantly different from zero.
An analysis is also provided of the returns earned by directors over the period
from ?ve days following their trade (where ?ve days is the maximum number of days
after the trade that the ASX requires directors to report their trade) to the day in which
the trade is reported. These results are provided in Table V. While the cumulative
abnormal return over this period for purchases by directors is not signi?cantly different
Purchases Sales
Post-trade Post-trade
Panel A: all trades
Mean (%) 0.0 20.2
Number 1,714 564
P-value (%) 41 0
Panel B: trades reported within ?ve days
Mean (%) 0.2 20.2
Number 1,471 472
P-value (%) 1 1
Panel C: trades reported between ?ve and ten days
Mean (%) 0.0 20.5
Number 113 43
P-value (%) 85 5
Panel D: trades not reported within ten days
Mean (%) 20.1 0.2
Number 130 49
P-value (%) 34 28
Panel E: resource ?rms
Mean (%) 0.3 0.0
Number 155 47
P-value (%) 17 96
Panel F: non-resource ?rms
Mean (%) 0.0 20.3
Number 1,559 517
P-value (%) 50 0
Notes: Cumulative abnormal returns are based on market model estimates from an estimation
window (2250 to 220); number of trades is for the ?rst day after the trades occur; P-value is for a two-
tailed test
Table IV.
Abnormal returns after
director trades in
own-company shares and
before disclosure is made
Purchases Sales
Post-trade Post-trade
All trades
Mean (%) 0.0 20.6
Number 243 92
P-value (%) 79 0
Notes: Cumulative abnormal returns are based on market model estimates from an estimation
window (2250 to 220); number of trades is for the sixth day after the trades occur; P-value is for a
two-tailed test
Table V.
Abnormal returns
subsequent to the ASX
required reporting date
up to the day the trade
is reported
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from zero, for sales by directors the cumulative abnormal return was 20.6 per cent and
signi?cant at the 1 per cent level. While in economic terms this return is small, for
investors who are trading and therefore for whom the marginal transaction costs are
zero (or very close to zero), it nevertheless represents a “cost” borne by uninformed
investors which results from the failure of directors to meet the ASX disclosure
requirements.
6. Summary
We investigate the extent of directors breaching the reporting requirements of the ASX
and the Corporations Act in Australia. We also update the work of Brown et al. (2003)
to determine whether directors in Australia achieve abnormal returns from trades in
their own companies. We apply the methodology of Seyhun (1986) in determining
whether an imitator could mimic director trades to earn abnormal returns. Previous
research is extended to determine the abnormal returns available to directors between
the time of insider trades and the time they report these trades to the market and the
abnormal returns subsequent to the ASX reporting requirement for the trades up to the
day the trade is reported. This methodology has not been adopted in previous
literature. Consistent with research by Brown et al. (2003), this analysis is conducted
for all companies, resource companies and non-resource companies. Analysis is also
conducted for trades reported within ?ve business days, between ?ve and ten business
days and trades not reported within ten business days.
On average, 13 per cent (7 per cent) of insider trades are not reported within the ?ve
(10) business days required by the ASX (as speci?ed in the Corporations Act). Second,
directors do appear to act as contrarian investors, purchasing (selling) shares when the
price is low (high). Third, directors do achieve abnormal returns through trading in
shares of their own companies. These results are largely driven by directors who report
trades within ?ve business days. Fourth, imitators adopting a strategy of purchasing
(selling) when directors purchase (sell) shares secure a small abnormal return.
However, it is highly unlikely that this abnormal return could cover transaction costs
and the buy/sell spread. Fifth, analysis of returns to directors after they trade but
before they announce the trade to the market shows that, over this period, directors are
making small but statistically signi?cant returns that are not available to the market.
Sixth, analysis of returns to directors subsequent to the ASX reporting requirement up
to the day the trade is reported shows that, over this period, directors are making small
but statistically signi?cant returns that should be available to the market.
Having established the extent of late reporting by Australian directors and the
small but statistically signi?cant disadvantage that this late reporting imposes on
outside shareholders, there is a need in future research to determine the linkages
between late reporting by directors and disadvantages to outside shareholders and the
implementation of blackout periods, trading windows and policies implemented within
companies to mitigate insider trading.
Notes
1. See ASX Media Release Gibbs (2008) and BT Financial Group (2005).
2. We are very grateful to an anonymous referee for suggesting this latter analysis.
3. As the event-study in this paper involves a short-window analysis, the conventional
methodology rather than the Barber and Lyon (1997) approach is employed. The Barber and
Australian
share market
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Lyon (1997, p. 341) methodology is designed to detect long-run (one to ?ve year) abnormal
stock returns.
4. By way of contrast, Brown et al. (2003) analyse all trades including “[. . .] changes in share
holdings for ‘miscellaneous’ and possibly uninformative reasons such as option conversions,
rights issues, employee share purchase schemes and participation in dividend reinvestment
plans. ‘Miscellaneous’ reasons result mostly in increases in shareholdings and add relatively
more noise to the purchases sub-sample”.
5. Large companies are the 100 companies with the largest market capitalisation in the All
Ordinaries Index, the next 273 companies are categorised as medium and small companies
are the 100 companies with the smallest market capitalisation in the All Ordinaries Index.
6. For example, if a director purchased shares on 15 January 2007 and reported the trade on
19 January 2007, then the abnormal returns on that company’s shares would be included in
the portfolio for days 15-18 January inclusive.
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ARJ
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Corresponding author
Robert Faff can be contacted at: [email protected]
Australian
share market
19
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This article has been cited by:
1. Millicent Chang, Iain Watson. 2015. Delayed disclosure of insider trades: Incentives for and indicators of
future performance?. Pacific-Basin Finance Journal 35, 182-197. [CrossRef]
2. Andrew Trumble, Sean Pinder. 2012. Evidence of managerial opportunism in Australia. Accounting
Research Journal 25:1, 25-40. [Abstract] [Full Text] [PDF]
3. Mathew J. Ratty, John L. Simpson, Peter D. MayallThe Signaling of Short Selling Activity in Australia
315-327. [CrossRef]
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doc_903412416.pdf
The purpose of this paper is to investigate the extent of directors breaching the reporting
requirements of the Australian Stock Exchange (ASX) and the Corporations Act in Australia. Further,
it seeks to assess whether directors in Australia achieve abnormal returns from trades in their own
companies.
Accounting Research Journal
The equity and efficiency of the Australian share market with respect to director
trading
Katherine Uylangco Steve Easton Robert Faff
Article information:
To cite this document:
Katherine Uylangco Steve Easton Robert Faff, (2010),"The equity and efficiency of the Australian share
market with respect to director trading", Accounting Research J ournal, Vol. 23 Iss 1 pp. 5 - 19
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The equity and ef?ciency
of the Australian share market
with respect to director trading
Katherine Uylangco and Steve Easton
University of Newcastle, Newcastle, Australia, and
Robert Faff
UQ Business School, University of Queensland, Brisbane, Australia
Abstract
Purpose – The purpose of this paper is to investigate the extent of directors breaching the reporting
requirements of the Australian Stock Exchange (ASX) and the Corporations Act in Australia. Further,
it seeks to assess whether directors in Australia achieve abnormal returns from trades in their own
companies.
Design/methodology/approach – Using an event study approach on an Australian sample,
abnormal returns for a range of situations were estimated.
Findings – A total of 13 (seven) per cent of own-company directors trades do not meet the ASX
(Corporations Act) requirement of reporting within ?ve (14) business days. Directors do achieve
abnormal returns through trading in shares of their own companies. Ignoring transaction costs,
outsiders can achieve abnormal returns by imitating directors’ trades. Analysis of returns to directors
after they trade but before they announce the trade to the market shows that directors are making
small but statistically signi?cant returns that are not available to the market. Analysis of returns to
directors subsequent to the ASX reporting requirement up to the day the trade is reported shows that
directors are making small but statistically signi?cant returns that should be available to the market.
Research limitations/implications – Future research should investigate the linkages between late
reporting by directors and disadvantages to outside shareholders and the implementation of internal
policies implemented to mitigate insider trading.
Practical implications – Market participants should remain vigilant regarding the potential for
late/non-reporting of directors’ trades.
Originality/value – Uncoveringbreaches of reportingregulations are particularlyimportant giventhat
directors tend to purchase (sell) shares when the price is low (high), thereby achieving abnormal returns.
Keywords Directors, Shares, Financial reporting, Australia
Paper type Research paper
1. Introduction
Recent media releases and reports from investment ?rms have highlighted that many
directors fail to meet the requirements of the Australian Stock Exchange (ASX) to
report their trades within ?ve business days of the transactions[1]. These reports also
document that some directors are in breach of the Corporations Act, which requires
them to report to the market within 14 days (herein referred to as ten business days).
With corporate governance being given greater focus in Australia and overseas, there
is a need for the extent of late reporting to be closely examined.
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1030-9616.htm
The authors wish to thank Jim Psaros and two anonymous referees for helpful comments.
Funding for the project was provided by the Melbourne Centre for Financial Studies.
Australian
share market
5
Accounting Research Journal
Vol. 23 No. 1, 2010
pp. 5-19
qEmerald Group Publishing Limited
1030-9616
DOI 10.1108/10309611011060506
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Brown et al. (2003) report that Australian directors on average achieve abnormal
returns from trading in shares of their own companies. The current paper extends upon
the Brown et al. evidence. We also examine the feasibility of imitators achieving
abnormal return from a trading strategy of buying (selling) shares when directors
report buying (selling) activity in their own stock. Such analysis has been undertaken
for the US market by Seyhun (1986), but is absent in Australia.
The motivation and contribution of the paper is therefore threefold. First, the paper
provides the ?rst academic research into the extent of late reporting by directors in
Australia. Second, it provides an examination of the abnormal returns earned by
imitators froma trading strategy of buying (selling) shares when directors report buying
(selling) activity in their own stock. Third, an analysis is undertaken to determine
whether directors are able to earn abnormal returns over the period between their
trading in shares and the subsequent reporting of those trades. This ?nal arm of our
investigation is extended by providing an analysis to determine whether directors’ late
reporting increases the abnormal returns directors are able to earn that are not available
to other investors. This approach has not been employed in previous studies. Notably,
it shows that returns are being missed by outside investors due to late reporting[2].
The paper is organised as follows. Section 2 describes the relevant literature,
Section 3 provides a discussion of the methodology, Section 4 examines the data
collection and the results are presented in Section 5. Section 6 provides a summary.
2. Literature review
Discussion regarding the late reporting of trading by directors in their own company
shares in Australia has largely been con?ned to the media. This includes a report by
BT Financial Group’s (2005) “Position paper – director and executive share trading”
released 11 November, examining all trades by directors in 2004 and a media release by
the ASX on 27 June 2008 reporting on whether trades by directors over the three
months to 31 March 2008 were reported to the ASX on time and in accordance with the
Corporations Act. In the UK, Balmforth et al. (2007) found that 14 per cent of all trades
by company directors in the UK were reported late. In Australia, Chang and Meynert
(2009) use year-end director shareholdings to estimate that over the period from 2002 to
2007, 45 per cent of directors failed to report at least one trade in any given year.
The most comprehensive study of director trades in Australia following the
mandatory reporting of such trades is by Brown et al. (2003). This study hypothesises
that directors behave as contrarian investors, using inside information to buy
shares when they are underpriced and to sell shares when they are overpriced. Major
?ndings by Brown et al. (2003) are that directors achieve abnormal returns from sales
(particularly for resource companies) in that byselling theyavoid future losses; however,
the purchases do not capture future abnormal price rises. They do not ?nd any bias due
to the size of the company or the size of trade.
Additional Australian studies demonstrate that directors are trading on inside
information, that at least some of these trades achieve abnormal returns and that some
strategies could provide abnormal returns to an imitator. Chang and Chopra (2007)
conclude that Australian director trades contain industry information and an imitator
can avoid losses by investing in the relevant industry following a trade by a director.
Freeman and Adams (1999) examine the extent of insider trading in Australia, prior
to the introduction of reporting requirements by the ASX, based on a survey of
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company directors. Freeman and Adams (1999, p. 1) report that “a signi?cant
proportion of directors indicated a propensity to time their trades based on inside
information”. Watson and Young (1998) show that insider trading occurs at the time
surrounding takeover announcements in Australia. Hotson et al. (2007) also show that
directors and imitators pro?t from trades in small companies.
Internationally, the most comprehensive study of director trading was undertaken by
Seyhun (1986) using US data. He ?nds that directors achieve abnormal returns from
both sales and purchases of shares in their own companies. However, he shows that
imitators could not achieve abnormal returns using a trading strategy that mimics the
behaviour of the directors. He also shows that those who are expected to know more
about the overall affairs of the ?rm, such as chairmen of the boards of directors or
of?cer-directors, make better trades than of?cers or share holders alone. In addition,
he concludes that insiders knowon which inside information to rely and can exploit this
information by adjusting the volume of trading. He also shows that the size of the
company is important and that ignoring greater transaction costs for smaller companies
may result in an overstatement of abnormal returns achieved by smaller companies.
Several international studies have analysed insider trading abnormal returns
available to directors of different sized companies. Seyhun (1986) and Lakonishok and
Lee (2001) show that abnormal returns are achieved by insiders for purchases of shares
in small companies. Gregory et al. (1994) also demonstrate that UK directors can
achieve abnormal returns particularly in small companies. However, they show that
applying a benchmark that takes account of company size eliminates abnormal
returns. Brown et al. (2003) con?rm that company size does not impact the abnormal
returns in such trading activity. Given that the data available for the current study is
biased towards larger stocks (those in the All Ordinaries Index), we do not conduct
analyses conditioned on size.
International studies attempt to ?nd additional indicators for abnormal returns of
insider trades by directors. Baesel and Stein (1979) show that US directors earn
abnormal returns by trading in their own company’s shares, and that bank directors
achieve the largest abnormal returns. Friederich et al. (2002) show that medium sized
trades by UK directors can predict future returns, but that this trading strategy does
not result in abnormal returns. Hillier and Marshall (2002) ?nd that director’s trading
in unison can be a good indicator for future share prices.
A strong asymmetry in insider trading pro?ts is widely documented. Jeng et al.
(2003) ?nd that US directors earn 6 per cent p.a. abnormal returns by purchasing
shares of their own companies, but that no abnormal returns are achieved from the sale
of shares. Pope et al. (1990) ?nd that there appears to be a sharp market movement
around the time director’s trade in shares of their own company, particularly on the
sell side.
The length of time over which abnormal returns are achieved is also examined in
international studies. Friederich et al. (2002) show that UK directors achieve abnormal
returns from short-term trades. Ke et al. (2003) demonstrate that US directors trade on
accounting information up to two years prior to an event taking place, but that trading
does not generally occur in the two quarters immediately prior to the event. They
conclude that this is consistent with directors adhering to the antifraud provisions of
the Securities and Exchange Act 1934, especially Section 10(b), which is designed to
prevent insider trading. Lakonishok and Lee (2001) show very little market movement
Australian
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surrounding US director trades at the time of the trade and at the time of reporting.
Pope et al. (1990) ?nd sharp market movement around the time directors trade in
shares of their own company.
There is still some debate about whether those attempting to imitate trades by
directors, purchasing (selling) shares when directors report that they have purchased
(sold) shares in their own company, can achieve abnormal returns. Gregory et al. (1997)
conclude that abnormal returns can be made by imitators when UK directors sell.
Lin and Howe (1990) show that in the USA, transaction costs eliminate pro?ts by both
inside traders and imitators.
3. Research method
This study uses the standard event study methodology to examine the abnormal returns
from director trades in the shares of their own company[3]. The ?rst section of analysis
examines the returns to directors fromtrading in shares of their own companies – day 0
is the day the trade takes place. The second section of analysis examines whether
abnormal returns could be earned by an imitator who trades based on when directors
trade – day 0 is the day the trade is reported to the market. The ?nal section of analysis
investigates the returns achieved by directors between the time they trade in shares of
their own company and the time the trade is reported to the market – day 0 is the day the
trade takes place, however, the returns are excluded from the analysis when the trade is
reported to the market. Cumulative abnormal returns are calculated using market model
estimates based on the All Ordinaries Accumulation Index from 250 days to 20 days
prior to the trade.
The pre-event period is ten business days prior to either the trade taking place or the
trade being reported to the market. The post-event period includes the day of the trade
taking place or the trade being reported and ten business days after either the trade taking
place or the trade being reported to the market.
4. Data
The sample of director trades is obtained from news releases of director’s interest from
the IRESS Market Technology Ltd (IRESS) database for the period from 1 January
2005 to 31 December 2007. Trades are only included in the sample where the trade and
the date of the trade was at the discretion of the director[4]. For this reason, director’
trades that resulted from dividend reinvestment schemes, the exercise of options, the
exercise of rights issues, or from employee share purchase plans, are excluded from the
analysis. These trades are obtained for the 473 companies that were included in the All
Ordinaries Index as on 1 January 2005.
As shown in Table I, the sample comprises 2,932 insider trades by directors: of
which 2,189 are purchases and 743 sales. The ASX requirement is that directors report
trades within ?ve business days. However, of the 2,932 trades, 376 or 13 per cent are
not reported within ?ve business days. Of the 2,189 (743) purchases (sales), 263 or
12 per cent (113 or 15 per cent) are not reported within ?ve business days. This ?nding
is consistent with that of the study by the ASX (as reported in a media release on
27 June 2008). The ASX reported that 538 (13 per cent) of the 4,137 notices of director
trades breached the ASX reporting requirements. BT Financial Group also released
a report in 2004 that stated that from its study 432 (15 per cent) of the 2,936 notices of
director trades breached the ASX requirement.
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The Corporations Law requirement is that directors report to the market within ten
business days of a trade in their own company. Figure 1 shows the length of time taken
to report trades by directors trading in their own company shares. Of the 2,932 trades,
212 or 7 per cent are not reported within ten business days. Of the 2,189 (743) purchases
(sales), 144 or 7 per cent (68 or 9 per cent) are not reported within ten business days.
This ?nding is also consistent with the ASX study, where 289 of the 4,137 notices
(7 per cent) breached the Corporations Act reporting requirements. The average
All trades Purchases Sales
Panel A: all companies
Number of trades 2,932 2,189 743
Length of time to report the trade
Within ?ve business days 2,556 1,926 630
Between ?ve and ten business days 164 119 45
More than ten business days 212 144 68
Panel B: large companies
Number of trades 996 732 264
Length of time to report the trade
Within ?ve business days 871 655 216
Between ?ve and ten business days 45 32 13
More than ten business days 80 39 31
Panel C: medium companies
Number of trades 1,107 780 327
Length of time to report the trade
Within ?ve business days 966 686 280
Between ?ve and ten business days 59 39 20
More than ten business days 82 55 27
Panel D: small companies
Number of trades 829 677 152
Length of time to report the trade
Within ?ve business days 721 587 134
Between ?ve and ten business days 61 49 12
More than ten business days 47 41 6
Panel E: trades 0 to 0.1 per cent outstanding shares
Number of trades 1,161 1,024 137
Length of time to report the trade
Within ?ve business days 1,001 895 106
Between ?ve and ten business days 59 52 7
More than ten business days 101 77 24
Panel F: trades 0.1 to 0.3 per cent outstanding shares
Number of trades 665 545 120
Length of time to report the trade
Within ?ve business days 592 495 97
Between ?ve and ten business days 30 24 6
More than ten business days 43 26 17
Panel G: trades .0.3 per cent outstanding shares
Number of trades 1,106 620 486
Length of time to report the trade
Within ?ve business days 965 538 427
Between ?ve and ten business days 76 44 32
More than ten business days 65 38 27
Table I.
Summary statistics
of director trades
Australian
share market
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(median) number of days to report is 16 (3) for all trades, 17 (3) for purchases and 15 (4)
for sales.
Table I also shows the number of trades and the time taken to report trades for
large, medium and small companies[5]. When purchases and sales are considered
together, no relationship between company size and timeliness of reporting is found.
For example, for each company-size category, 87 per cent of trades are reported within
?ve business days. However, for this sample the failure to report sales within ?ve
business days is particularly apparent for larger companies, with 18, 14 and 12 per cent
of director sales for large, medium and small companies, respectively, being reported
after ?ve business days.
When purchases and sales are consider together, there is also no relationship
between the size of the trade and timeliness of reporting. However, where the trade size
is small, only 77 per cent of sales are reported with ?ve business days, as compared
with 81 per cent for the medium sized trades and 88 per cent for the largest sized trades.
Information regarding the number of trades and the time taken to report trades for
resource companies and non-resource companies was also collected. When purchases
and sales are considered together, directors of resources companies more often report
trades within ?ve business days than do directors of non-resource companies. For
example, for resource companies, 92 per cent of trades are reported within ?ve business
days whereas for non-resource companies 87 per cent of trades are reported within ?ve
business days. This pattern is particularly apparent for sales with 8 per cent of trades
being reported after ?ve business days for resource companies and 16 per cent of
trades being reported after ?ve business days for non-resource companies.
These results show the extent of non-compliance with the ASX rules and with the
Australian legal requirements by directors required to report trades in their own
companies to the market. Approximately, 13 per cent (7 per cent) of all trades are not
reported to the ASX (market) within the speci?ed timeframe. Such late reporting by
directors con?rms the perceptionthat the market is not beinginformedina timelymanner.
Figure 1.
Length of time
to report trades
0
5
10
15
20
25
Number of days to report trades in own company shares
0 1 2 3 4 5 6 7 8 9 10 More
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5. Results
5.1 Returns for trades by directors in relation to the day of trade
Table II shows average abnormal returns before and after trades by directors in their
own-company shares. For this analysis and all analysis of returns associated with
director trades, where more than one director purchased (sold) shares on the same day,
only the trade that was reported ?rst was included in the analysis. This screen reduced
the sample of purchases (sales) from 2,189 (743) to 1,949 (632).
For the total sample, the cumulative abnormal return over the ten business days
prior to directors purchasing shares was 21.6 per cent and signi?cantly different from
zero at the 1 per cent level, while the cumulative abnormal return over the ten business
days following the trade was 0.4 per cent and signi?cantly different from zero at the
5 per cent level. Conversely, the cumulative abnormal return over the ten business days
prior to directors selling shares was 1.8 per cent and signi?cantly different from zero,
with the cumulative abnormal return over the ten business days following the trade
being 20.8 per cent and signi?cantly different from zero. These results demonstrate
that directors avoid losses of 0.8 per cent by selling shares in their own companies.
Table II also shows the average abnormal returns before and after directors trade in
their own-company shares categorised by the time taken to report the trade. It shows that
the results above are largely driven by directors reporting trades within ?ve business
Purchases Sales
Pre-trade Post-trade Pre-trade Post-trade
Panel A: all trades
Mean (%) 21.6 0.4 1.8 20.8
Number 1,949 1,949 632 632
P-value (%) 0 3 0 0
Panel B: trades reported within ?ve days
Mean (%) 21.7 0.4 2.1 20.8
Number 1,706 1,706 540 540
P-value (%) 0 3 0 1
Panel C: trades reported between ?ve and ten days
Mean (%) 20.9 0.8 0.2 22.1
Number 113 113 43 43
P-value (%) 22 25 91 1
Panel D: trades not reported within ten days
Mean (%) 21.4 20.1 0.4 20.1
Number 130 130 49 49
P-value (%) 24 93 76 90
Panel E: resource ?rms
Mean (%) 22.3 1.2 2.0 22.0
Number 178 178 56 56
P-value (%) 0 6 5 7
Panel F: non-resource ?rms
Mean (%) 21.6 0.3 1.8 20.8
Number 1,771 1,771 576 576
P-value (%) 0 8 0 0
Notes: Cumulative abnormal returns are based on market model estimates from an estimation
window (2250 to 220); cumulative abnormal returns are calculated from t 2 10 to t 2 1 then from t0
to t10; P-value is for a two-tailed test
Table II.
Abnormal returns before
and after director trades
in own-company shares
Australian
share market
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days of the trade taking place. The cumulative abnormal return over the ten business days
prior to purchases for this groupwas 21.7 per cent, while the cumulative abnormal return
over the ten business days following the trade was 0.4 per cent, both signi?cant (at the
1 and 5 per cent levels, respectively). Conversely, the cumulative abnormal return over the
ten business days prior to directors selling shares was 2.1 per cent and signi?cantly
different from zero, with the cumulative abnormal return over the ten business days
following the trade being 20.8 per cent and signi?cantly different from zero.
For trades reported between ?ve and ten business days after the trade, only the
cumulative abnormal return of 22.1 per cent over the ten business days following sales
was signi?cantly different from zero. For trades not reported within ten business days
none of the cumulative abnormal returns for purchases or sales are signi?cantly different
from zero. While the ?ndings of Chang and Meynert (2009) suggest that it is likely that
there is also considerable failure to report trades at all, the ?nding that abnormal returns
are associated with trades that are reported within a ?ve-day period is suggestive that
failure to report is not be associated with abnormal return performance.
For resource companies, the cumulative abnormal return over the ten business days
prior to directors purchasing shares was 22.3 per cent and signi?cantly different from
zero at the 1 per cent level, while the cumulative abnormal return over the ten business
days following the trade was 1.2 per cent and not signi?cantly different from zero.
Conversely, the cumulative abnormal return over the ten business days prior to directors
selling shares was 2.0 per cent and signi?cantly different fromzero at the 5 per cent level,
with the cumulative abnormal return over the ten business days following the trade
being 22.0 per cent and not signi?cantly different from zero.
Figure 2 shows a graphical representation of Table II. It shows the cumulative
abnormal daily returns for ten business days before and after purchases and sales by
company directors. The cumulative abnormal returns prior to a purchase are negative
Figure 2.
Abnormal returns ten
business days before and
after director trades in
own-company shares
–2.5
–2.0
–1.5
–1.0
–0.5
0.0
0.5
1.0
1.5
2.0
2.5
t–10 t–9 t–8 t–7 t–6 t–5 t–4 t–3 t–2 t–1 t0 t+1 t+2 t+3 t+4 t+5 t+6 t+7 t+8 t+9 t+10
Number of days before or after the trade
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and signi?cant, while the cumulative abnormal returns after the purchase are not
signi?cant. The signi?cant positive returns prior to a sale are followed by signi?cantly
negative returns after the sale.
The results reported in this section are broadly consistent with Brown et al. (2003) in
that prior to purchases companies experienced negative returns and prior to sales,
companies experienced positive returns. Following the purchases, there are slightly
positive returns and following the sales there are negative returns. The results for
resource companies do not support those of Brown et al. (2003) in that the purchase (sale)
of shares by directors of resource companies is not followed by positive (negative)
returns, we also do not ?nd that the abnormal returns following sales are statistically
signi?cant. This ?nding is also consistent with Pope et al. (1990) who conclude that
directors do make abnormal returns particularly in being able to avoid losses by selling
prior to share price falls.
5.2 Returns from a trading strategy from the day of reporting the trades
This section demonstrates a trading strategy for an outsider to imitate trades by
directors by purchasing (selling) shares when a director discloses to the market that
they have purchased (sold) shares. It examines the returns before and after purchases
and sales of company shares are reported.
Table III shows average abnormal returns to imitators before and after directors
report trades in their own-company shares. For the total sample, the cumulative
abnormal return over the ten business days prior to directors reporting purchasing
shares was 21.1 per cent and signi?cantly different from zero at the 1 per cent level,
while the cumulative abnormal return over the ten business days following the trade
being reported was 0.2 per cent and not signi?cantly different fromzero. Conversely, the
cumulative abnormal return over the ten business days prior to directors reporting
selling shares was 1.1 per cent and not signi?cantly different from zero, with the
cumulative abnormal return over the ten business days following the trade being
reported being 21.1 per cent and signi?cantly different fromzero. Results in Section 5.1
demonstrate that directors avoid losses of 0.8 per cent by selling shares in their own
companies. This section demonstrates that imitators could achieve an abnormal return
of 1.1 per cent by short-selling shares when directors report the sale of shares. As noted
by Seyhun (1986), while transaction costs will be heterogeneous across ?rmsize, trading
volume and trade size, it is likely that after allowing for such costs abnormal returns are
likely to be small.
Table III also shows that the overall results are largely driven by directors who
report trades within ?ve business days of the trade taking place. The cumulative
abnormal return over the ten business days prior to directors reporting purchasing
shares was 21.3 per cent and signi?cantly different from zero at the 1 per cent level,
while the cumulative abnormal return over the ten business days following the trade
being reported was 0.2 per cent and not signi?cantly different from zero. Conversely,
the cumulative abnormal return over the ten business days prior to directors reporting
selling shares was 1.3 per cent and signi?cantly different from zero, with the
cumulative abnormal return over the ten business days following the trade being
reported being 20.9 per cent and signi?cantly different from zero. For trades reported
between ?ve and ten business days after the trade, only the cumulative abnormal
return of 23.6 per cent over the ten business days following the sale being reported
Australian
share market
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was signi?cantly different from zero. For trades not reported within ten business days,
none of the cumulative abnormal returns for purchases or sales are signi?cantly
different from zero.
For resource companies, the cumulative abnormal return over the ten business days
prior to directors reporting purchasing shares was 21.7 per cent and signi?cantly
different fromzero at the 1 per cent level, while the cumulative abnormal return over the
ten business days following the trade being reported was 1.2 per cent and signi?cantly
different from zero at the 5 per cent level. Conversely, the cumulative abnormal return
over the ten business days prior to directors reporting selling shares was 1.5 per cent and
not signi?cantly different from zero, with the cumulative abnormal return over the ten
business days following the trade being reported being 22.2 per cent and signi?cantly
different fromzero at the 5 per cent level. This section demonstrates that imitators could
achieve an abnormal return of 1.2 per cent by purchasing shares when directors report
the purchase of shares and an abnormal return of 2.2 per cent by selling shares when
directors report the sale of shares.
Figure 3 shows a graphical representation of Table III. It shows the cumulative
abnormal daily returns for ten business days before and after the reporting of purchases
and sales by company directors. The cumulative abnormal returns prior to a purchase
being reported are negative and signi?cant. The cumulative abnormal returns after
Purchases Sales
Pre-trade Post-trade Pre-trade Post-trade
Panel A: all trades
Mean (%) 21.1 0.2 1.1 21.1
Number 1,949 1,949 632 632
P-value (%) 0 8 6 0
Panel B: trades reported within ?ve days
Mean (%) 21.3 0.2 1.3 20.9
Number 1,706 1,706 540 540
P-value (%) 0 28 1 0
Panel C: trades reported between ?ve and ten days
Mean (%) 20.7 0.6 21.3 23.6
Number 113 113 43 43
P-value (%) 29 25 19 0
Panel D: trades not reported within ten days
Mean (%) 1.5 0.9 0.7 21.1
Number 130 130 49 49
P-value (%) 20 33 18 12
Panel E: resource ?rms
Mean (%) 21.7 1.2 1.5 22.2
Number 178 178 56 56
P-value (%) 1 1 20 3
Panel F: non-resource ?rms
Mean (%) 21.2 0.2 1.6 21.2
Number 1,771 1,771 576 576
P-value (%) 0 22 1 0
Notes: Cumulative abnormal returns are based on market model estimates from an estimation
window (2250 to 220); cumulative abnormal returns are calculated from t 2 10 to t 2 1 then from
t0 to t10; P-value is for a two-tailed test
Table III.
Abnormal returns before
and after director
discloses trades in
own-company shares
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the purchase are not statistically signi?cant. The positive returns prior to a sale being
reported are followed by signi?cantly negative returns after the sale is reported.
However, there is some evidence that the peak in positive returns prior to sales and
negative returns prior to purchases occurs prior to the trades being reported.
5.3 Abnormal returns from trades by directors prior to reporting the trades
This section analyses returns to directors after they trade but before they announce the
trade to the market. Day zero is de?ned as the day the director trades in shares of their
own company. The reported abnormal returns are those from a portfolio that has an
equal weight in all shares from time zero to the day prior to the trade being reported[6].
For the full sample of purchases, the cumulative abnormal return after purchases but
before the reporting of the trade is not signi?cantly different from zero. This suggests
that directors do not earn abnormal returns after purchasing shares in their own
companies that is not available to the market due to the delay in reporting. However, the
cumulative abnormal return after sales but before the reporting of the sale, was small
(20.2 per cent) but signi?cantly less than zero. This suggests that directors are able to
avoid a small but statistically signi?cant price fall that may not be avoided by the
market due to the delay in reporting.
Table IValso shows that the overall results are largely driven by directors who report
trades within ?ve business days of the trade taking place. The cumulative abnormal
return after sales but before the reporting of the sale, was small (20.2 per cent) but
signi?cantly less than zero. For trades reported between ?ve and ten business days after
the trade, the cumulative abnormal return after sales but before the reporting of a sale
was 20.5 per cent and signi?cant at the 5 per cent level; however, for trades not reported
within ten business days, none of the cumulative abnormal return after purchases (sales)
but before the reporting of the purchase (sale) are signi?cantly different from zero.
Figure 3.
Abnormal returns ten
business days before and
after director discloses
trades in own-company
shares
–1.5
–1.0
–0.5
0.0
0.5
1.0
1.5
2.0
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t–10 t–9 t–8 t–7 t–6 t–5 t–4 t–3 t–2 t–1 t0 t+1 t+2 t+3 t+4 t+5 t+6 t+7 t+8 t+9 t+10
Number of days before or after the trade
Purchases Sales
Australian
share market
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For resource companies, the cumulative abnormal return after purchases (sales) but
before the reporting of the purchase (sale) are not signi?cantly different from zero.
An analysis is also provided of the returns earned by directors over the period
from ?ve days following their trade (where ?ve days is the maximum number of days
after the trade that the ASX requires directors to report their trade) to the day in which
the trade is reported. These results are provided in Table V. While the cumulative
abnormal return over this period for purchases by directors is not signi?cantly different
Purchases Sales
Post-trade Post-trade
Panel A: all trades
Mean (%) 0.0 20.2
Number 1,714 564
P-value (%) 41 0
Panel B: trades reported within ?ve days
Mean (%) 0.2 20.2
Number 1,471 472
P-value (%) 1 1
Panel C: trades reported between ?ve and ten days
Mean (%) 0.0 20.5
Number 113 43
P-value (%) 85 5
Panel D: trades not reported within ten days
Mean (%) 20.1 0.2
Number 130 49
P-value (%) 34 28
Panel E: resource ?rms
Mean (%) 0.3 0.0
Number 155 47
P-value (%) 17 96
Panel F: non-resource ?rms
Mean (%) 0.0 20.3
Number 1,559 517
P-value (%) 50 0
Notes: Cumulative abnormal returns are based on market model estimates from an estimation
window (2250 to 220); number of trades is for the ?rst day after the trades occur; P-value is for a two-
tailed test
Table IV.
Abnormal returns after
director trades in
own-company shares and
before disclosure is made
Purchases Sales
Post-trade Post-trade
All trades
Mean (%) 0.0 20.6
Number 243 92
P-value (%) 79 0
Notes: Cumulative abnormal returns are based on market model estimates from an estimation
window (2250 to 220); number of trades is for the sixth day after the trades occur; P-value is for a
two-tailed test
Table V.
Abnormal returns
subsequent to the ASX
required reporting date
up to the day the trade
is reported
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from zero, for sales by directors the cumulative abnormal return was 20.6 per cent and
signi?cant at the 1 per cent level. While in economic terms this return is small, for
investors who are trading and therefore for whom the marginal transaction costs are
zero (or very close to zero), it nevertheless represents a “cost” borne by uninformed
investors which results from the failure of directors to meet the ASX disclosure
requirements.
6. Summary
We investigate the extent of directors breaching the reporting requirements of the ASX
and the Corporations Act in Australia. We also update the work of Brown et al. (2003)
to determine whether directors in Australia achieve abnormal returns from trades in
their own companies. We apply the methodology of Seyhun (1986) in determining
whether an imitator could mimic director trades to earn abnormal returns. Previous
research is extended to determine the abnormal returns available to directors between
the time of insider trades and the time they report these trades to the market and the
abnormal returns subsequent to the ASX reporting requirement for the trades up to the
day the trade is reported. This methodology has not been adopted in previous
literature. Consistent with research by Brown et al. (2003), this analysis is conducted
for all companies, resource companies and non-resource companies. Analysis is also
conducted for trades reported within ?ve business days, between ?ve and ten business
days and trades not reported within ten business days.
On average, 13 per cent (7 per cent) of insider trades are not reported within the ?ve
(10) business days required by the ASX (as speci?ed in the Corporations Act). Second,
directors do appear to act as contrarian investors, purchasing (selling) shares when the
price is low (high). Third, directors do achieve abnormal returns through trading in
shares of their own companies. These results are largely driven by directors who report
trades within ?ve business days. Fourth, imitators adopting a strategy of purchasing
(selling) when directors purchase (sell) shares secure a small abnormal return.
However, it is highly unlikely that this abnormal return could cover transaction costs
and the buy/sell spread. Fifth, analysis of returns to directors after they trade but
before they announce the trade to the market shows that, over this period, directors are
making small but statistically signi?cant returns that are not available to the market.
Sixth, analysis of returns to directors subsequent to the ASX reporting requirement up
to the day the trade is reported shows that, over this period, directors are making small
but statistically signi?cant returns that should be available to the market.
Having established the extent of late reporting by Australian directors and the
small but statistically signi?cant disadvantage that this late reporting imposes on
outside shareholders, there is a need in future research to determine the linkages
between late reporting by directors and disadvantages to outside shareholders and the
implementation of blackout periods, trading windows and policies implemented within
companies to mitigate insider trading.
Notes
1. See ASX Media Release Gibbs (2008) and BT Financial Group (2005).
2. We are very grateful to an anonymous referee for suggesting this latter analysis.
3. As the event-study in this paper involves a short-window analysis, the conventional
methodology rather than the Barber and Lyon (1997) approach is employed. The Barber and
Australian
share market
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Lyon (1997, p. 341) methodology is designed to detect long-run (one to ?ve year) abnormal
stock returns.
4. By way of contrast, Brown et al. (2003) analyse all trades including “[. . .] changes in share
holdings for ‘miscellaneous’ and possibly uninformative reasons such as option conversions,
rights issues, employee share purchase schemes and participation in dividend reinvestment
plans. ‘Miscellaneous’ reasons result mostly in increases in shareholdings and add relatively
more noise to the purchases sub-sample”.
5. Large companies are the 100 companies with the largest market capitalisation in the All
Ordinaries Index, the next 273 companies are categorised as medium and small companies
are the 100 companies with the smallest market capitalisation in the All Ordinaries Index.
6. For example, if a director purchased shares on 15 January 2007 and reported the trade on
19 January 2007, then the abnormal returns on that company’s shares would be included in
the portfolio for days 15-18 January inclusive.
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Corresponding author
Robert Faff can be contacted at: [email protected]
Australian
share market
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