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korean management review - Vol. 49 , No. 5

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[ Article ]
korean management review - Vol. 49, No. 5, pp. 1163-1190
Abbreviation: kmr
ISSN: 1226-1874 (Print)
Print publication date 31 Oct 2020
Received 18 Jan 2020 Revised 03 Jun 2020 Accepted 04 Jul 2020
DOI: https://doi.org/10.17287/kmr.2020.49.5.1163
The Insider Trading behavior before Negative Events for Stock Prices
Moonchul Kim ; Sungjoon Huh ; Mun Ho Hwang
(First Author) Kyung Hee University (kimc@khu.ac.kr)
(Corresponding Author) Kyung Hee University (shuh5@khu.ac.kr)
(Co-Author) Kyung Hee University (mhhwang@khu.ac.kr)
부정적 사건 전 내부자거래 행태

Copyright 2011 THE KOREAN ACADEMIC SOCIETY OF BUSINESS ADMINISTRATION This is an open access article distributed under the terms of the Creative Commons Attribution License 4.0, which permits unrestricted, distribution, and reproduction in any medium, provided the original work is properly cited.

Abstract

We investigate the insider trading behavior before the disclosure of negative events. Specifically, we examine whether insider sales increase before a negative event occurs, when they concentrate, and whether corporate governance plays an active role in monitoring insider trading.

The major findings of the study are as follows.

First, the stock prices of firms with negative events decline about 10 months before the negative events. Insider trades by executives and largest shareholders show significant net selling behavior at least 24 months before the negative events. It is interpreted that insiders with private information about firm’s future negative events sell stock in advance to avoid losses. Second, foreign investors or institutional investors do not play a significant role in monitoring opportunistic insider trading before negative events such as accounting fraud detection and administrative issues designation. Third, insider sales of ‘10% or more major shareholders’ occurred much later than those of ‘executives and largest shareholders’. It could be due to the different ability of the insider to access the inside information of the firm.

This study extends the scope of related research by analyzing the insider transactions that occur before negative events such as detection of fraud or administrative issues designation in Korea. In addition, the results of this study show that insider trading occurs two years before the negative event, which provides useful insights for the regulatory authorities in charge of preventing unfair insider trading in the capital market.


Keywords: insider trading, negative events, corporate governance, information asymmetry

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• The author Moonchul Kim is currently a professor at the Department of Accounting and Taxation of KyungHee University. He earned his Ph.D. in Accounting from the University of Illinois in the United States. His major research areas are the value relevance of accounting information, earning management, insider trading and accounting, and audit quality.

• The author Sungjoon Huh is currently a lecturer at the Department of Accounting and Taxation of KyungHee University. He earned his Ph.D in business administration from KyungHee University. The main research areas are the value relevance of accounting information, insider trading, and public sector accounting.

• The author Mun-Ho Hwang is an associate professor of Accounting and Taxation Department at KyungHee University. He graduated from KyungHee University majoring in Trade, and obtained a Ph.D. in business administration from Korea University. The main research areas are insider trading, voluntary disclosure, earnings management and audit quality in the financial accounting field.