title: Insider Trading and Information in Financial Markets
Creators: name: Steiner, Christian
Publisher: name: Universität Bern
Year: 2025
Subjects: subject: 330 Economics

description: The first essay is based on data on loan renegotiations, insider trades, and stock returns from publicly traded U.S. firms to investigate the flow of private information. In this paper, we argue that banks’ information on their borrowers disseminates to managers during loan renegotiations. When managers trade in their firm’s stock, the information reaches investors in financial markets and impacts share prices. We find that stock returns are higher (lower) following months with both informative insider purchases (sales) and loan amendments. Consistent with an information transfer, the effect is stronger when the involved lenders have a high quality, and for firms without credit rating, closer to default, and with more illiquid stocks. This paper contributes to the literature by establishing insider trading as a new channel, through which financial markets receive private information from lenders. Insider trades are therefore helpful for market participants to interpret loan renegotiations. We are the first to look at the joint effect of insider trading and loan amendments on future stock returns. By documenting the additional effect on returns of this combination of events, we show that the market receives valuable information about borrowers’ financial health. The effect on returns also contributes to the market efficiency literature as it shows that insider trades around loan amendments help keep security prices closer to fundamental values. The second essay examines how officers and directors react to insider trading activities in closely related companies. My main finding is that probability, frequency, and profitability of trades increase when they are done after peer trades. The increase in frequency and probability tends to happen in the same direction as in the peer companies. The results are consistent with managers gathering valuable information from peer trades about their company’s industry. In principle, managers could also increase trading for purely social reasons (peer effect). However, additional evidence from peer trades influenced by factors orthogonal to the focal firm, speaks against this approach. This study contributes to the literature by providing evidence that insider trades are relevant not only for the valuation of the company whose shares are traded, but also for peer firm valuation. Higher profitability following peer trades can also be interpreted as constituting an additional channel through which insiders can monetize their advantage in processing publicly available information. Second, I add insider trades as a channel for intra-industry information spillovers. So far, this strand of literature has been more focused on earnings announcements. Third, I contribute to the literature on managerial learning from outside sources by showing that besides the well-established learning from stock prices, managers can gather relevant information from insider trades in peer companies. The third essay analyzes shareholder protection in newly public firms using a hand-collected sample of U.S. venture-backed companies where founders are still active. Our main finding is that the current shareholder protection framework is not sufficient to prevent insiders from generating abnormal returns to their sales transactions. As weak spots we identify the generous limits set by Rule 144, the circumvention of the rule by venture capitalists via in-kind distributions, and the fact that Form 144 can be filed concurrently with the actual transaction on Form 4, rendering the former useless. This paper makes multiple contributions to the literature. First, we provide a detailed overview on the evolution of ownership by founders, financial and strategic venture capitalists after going public. For our sample, we can link ownership and trades. We contribute to the insider trading literature by showing that in newly public firms, insider transactions are still highly profitable. Lastly, we provide an update to Gompers and Lerner (1998) which is due since the regulation on disclosure of in-kind distributions has changed. Our results indicate that increased disclosure has no notable effect on the profitability of these distributions. Overall, my thesis contributes to the literature in the aforementioned areas of information in financial markets, corporate governance, and market efficiency by analyzing three aspects of insider trading. The first essay shows how information that managers obtain from lending banks enters share prices through insider trading. The second essay concentrates on the information flow between managers in companies operating in related product markets. Its contribution is to establish managerial learning from peer insider trading. The third essay looks at how insiders reduce their holdings in newly public firms. It expands the literature by revealing gaps in current shareholder protection laws in the U.S. and in young firms’ corporate governance structures.