Information leakage and insider trading prior to market switches in the UK

This PhD thesis comprises three empirical studies relating to the phenomenon of market switches in the UK and more specifically the moves from the Alternative Investment Market (AIM) to the Main Market (MM) and vice versa. The AIM is a secondary, light and exchange regulated market and the MM is a main and traditional regulated market. The markets have several eligibility and ongoing regulatory differences between them. The main scope of the AIM is to act as the stepping stone to the MM and to attract small and high growth firms that cannot join the MM due its strict eligibility criteria. However, it has rapidly started to attract many firms from all over the world as well as from the MM gaining its own identity and reputation. AIM’s success in attracting a large number of firms, spawned the creation of similar markets across the world, while it attracted interest from regulators in considering the establishment of decentralised regulatory markets in other countries. Some recent examples include the launch of the AIM Italia in 2008 and the Tokyo Pro Market (formerly known as Tokyo AIM) in 2009. The first empirical chapter tests the information leakage hypothesis and explores whether firms experience abnormal stock price reactions prior to the announcement of the move from the AIM (a light regulated market) to the MM (a traditional regulated market) and vice versa. By examining 406 moves between the two markets from 1996 to 2015, I find evidence of abnormal stock returns and abnormal trading volume prior to the announcement of the switches, after controlling for rumours through media coverage and other major corporate announcements. More specifically, I find price reductions and increases in trading volume for the firms that move from the MM to the AIM, a move which is characterised as a market downgrade. On the contrary, I find price run ups and increases in trading volume for the firms that move from the AIM to the MM, a move which is deemed as a market upgrade. The abnormal stock returns on both events remain statistically significant after matching the sample firms with similar firms that did not switch markets during the same period. I further find a significant and contemporaneous relation between the abnormal stock returns and the abnormal trading volume, in line with the information leakage hypothesis. The second empirical chapter investigates whether corporate insiders trade on their own personal accounts in order to generate profit from the abnormal stock returns triggered from the market switches. I examine insider trading activity in 352 firms that move between the two markets during the period of 1999-2015. Using time series, cross sectional and difference in differences tests, I find abnormal insider trading activity on both events. In particular, I find increases in corporate insider sales and decreases in corporate insider purchases which translates to significant decreases in corporate insider net purchases six months prior to the official announcement of the switch from the MM to the AIM. In addition, I find insignificant increases in corporate insider purchases and significant decreases in corporate insider sales which results in significant decreases in corporate insider net purchases one year prior to the announcement of the move from the AIM to the MM. The third empirical chapter explores whether reputable Nominated Advisers (Nomads), firms which are the regulatory body and trading monitor of the AIM, could play a role in reducing the levels of abnormal stock price activities that are documented in the first empirical chapter. By creating a reputation ranking composite variable using five different measures, I find that reputable Nomads reduce the abnormal stock price reactions 60 trading days prior to the announcement of the switches on both events from 1996 to 2015. However, the reductions decrease or even diminish when reputable Nomads simultaneously act as brokers in the respective firms, raising concerns as to whether the Nomads take the necessary safeguards in order to avoid any potential conflict of interest that might arise by having duties of two different roles within the same firm. The results are qualitatively similar after controlling for different ranking benchmarks. In summary, the main findings of this thesis suggest that informed investors and corporate insiders take advantage of the private information they possess prior to market switches between a light regulated market and a traditional regulated market in order to generate profit. However, I argue that quality and reputable regulators/advisors can mitigate this effect by reducing the information asymmetry between insiders and outsiders. The results can be of interest to academics as I introduce a new corporate event in the information leakage and insider trading literature as well as to policy makers and to regulators as I point to a new direction which lacks focus. Finally, the results can benefit investors as they can potentially avoid market abusive behaviours during these events.