Insider Stock Trading and the Bond Market

Abstract

Very little is known about how bond market participants react to insider stock trades. Our study attempts to fill this gap in the literature by analyzing the bond market reactions around insider transactions in U.S. firms during the period from 2002 to 2009. Our dataset covers 993 stock purchases and 6,562 stock sales by corporate insiders. We employ event study methodology to determine the cumulative abnormal bond price returns in a number of predetermined subperiods around the publication date and find that insider purchases negatively influence corporate bond prices, whereas insider sales appear to convey a positive signal to the bond market. The results for purchases are most obvious for financial firms and for investment-grade firms. The results for sales are larger in the subsamples including non-financial firms and non-investment-grade firms. For both purchases and sales, the effect is largest when the transactions are executed by insiders who are both corporate executive officers and chairmen or during the crisis period. The results of our regression analysis support the findings from the event study and reveal that purchases related to benefit plans transmit a less negative signal to the market than other purchases.

TOPICS: Fixed income and structured finance, statistical methods