Market Timing Ability Of Managerial Transaction And Its Effect On Stock Market

Insiders of publicly listed corporations usually possess more information about their company than do outside shareholders, whether therefore insider trading in the second market is allowed is always controversial. However, legal insider trading isn’t banned in the most western countries. Our country also starts to allow directors, supervisors as well as senior managers of listed corporations in the second market to buy and sell stocks of their own companies, which initiates the new page of insider trading in our country.Managers of listed corporations include directors, supervisors as well as senior managers, whereas we name the behavior of managers buying and selling their own stocks in the second market managerial transaction. Managers may choose timing to trade, whereas transactional incentive is different respectively. In order to protect market principle of fairness, publicity, and justice as well as to improve market transparency, information disclosure of managerial transaction in listed corporation becomes an important facet for morden financial system. However, managerial transaction exist quite serious delays in disclosure problem (Betzer and Theissen,2010), delays in managerial trading information disclosure distort stock price between trading day and day of information disclosure, further also affect pricing efficiency for stock price (Etebari et al.,2003; Betzer and Thissen,2010; Zeng Qingsheng,2011). In many instances, investors mimic the trading of manager, which is evidence that the market considers managerial transaction an important source of information pertaining to the long-term prospects of a firm (Allen and Ramanan,2010). It follows then that trading by corporate manager can change the value of a firm’s stock, and the level of market efficiency determines whether any manager or investor will obtain an above normal return as a result. The profitability that manager trades stock in their own company gives rise to be concerned by every market subject on efficiency of financial market.The paper with managerial transaction as the theme, with managerial market timing ability as the start point, test empirically the existence of market timing ability of listed manager in our country, based on which the paper analyzes market timing ability of manager in listed corporation and it’s effect on stock’s market, and puts forward some proposals.The main contents in the paper are as follows:The first chapter elaborates mainly the important theoretical value and practical problems of study on managerial market timing ability in the listed corporation as well as its effect on stock market. Based on requirement for the paper, it renews to difine the concept of insider trading and "insider trading", managerial transaction and market timing ability of managerial transaction, which establishes the base of following contents in the paper.The second chapter summarizes the related literature about managerial transaction at home and abroad, from the several angles of market timing ability of managerial transaction, managerial trading incentive, and the effect of managerial transaction on stock market.The third chapter test empirically the existence of managerial market timing ability of manager of listed corporation in China. This chapter based on data from directors, supervisors and senior managers in listed corporations trading their own company’s stocks in the second market in web site of Shanghai stock exchange and Shenzhen stock exchange, as well as managerial gender, daily returns, daily market capitalizations, stock price, seasoned equity offerings and so on data in listed corporation of database of GTA CSMAR Solution, RESSET/DB and database of Wind, analyzes long-term and short-term market timing ability of manager in listed corporation. To classify managers in listed corporation as gender and category, analyze market timing ability of manager and long-term and short-term effect. Classification by gender, the paper classifying managers as male buyer, male seller, female buyer, and female seller, analyzes empirically market timing ability of manager of these classifications, and go on comparison with them. Classification by category, the paper classifying managers as directors buy, directors sale, supervisors buy, supervisors sale, senior managers buy, and senior managers sale, analyzes empirically long and short-term and market timing ability of these classifications, and go on comparison with them. Furthermore the paper tests correctness of information hierarchy hypothesis.Finally, classification by gender and category together, the paper classifying managers as male directors buy, male directors sale, male supervisors buy, male supervisors sale, male senior managers buy, male senior managers sale, female directors buy, female directors sale, female supervisors buy, female supervisors sale, female senior managers buy, and female senior managers sale, analyzes empirically long and short-term and market timing ability of these classifications, and go on comparison with them.The fourth chapter analyzes the effect of information announcement effect in corporation on managerial transaction from seasoned equity offerings (SEOs), and study market timing ability of manager. The chapter starting from long and short-term effect, study market timing ability of manager around SEOs. When it analyzes empirically returns of managerial transaction, and analyzes correlation between returns after SEOs and before activity of managerial transaction. To future test market timing hypothesis, and test that managers possess superior information about their own stock values.The fifth chapter mainly analyzes the effect of managerial transaction on efficiency of stock market, which is based on the previous chapters. The chapter analyzes the effect of announcements of managerial transaction on market efficiency by stochastic choosing companies of20managerial buying transactions and20managerial selling transactions.The sixth chapter studies the effect of managerial transaction on market liquidity. The study of abroad literature shows that there exist several controversial in the effect of insider trading on market liquidity of security, and exist several indicators for measuring market liquidity. The chapter views trading volume as liquidity indicator, and examines the effect of managerial transaction on market liquidity by using event study method.The seventh chapter summarizes the main viewpoints and conclusion in the paper, based on which puts forward some proposals for supervision department in security market. Lastly, the paper gives the future study direction.The main conclusions in the paper are as follows:(1) By research on abnormal returns earning around managerial transaction, finding that other classifications’ managers purchase after prices fall and sell after prices rise except for somewhat insignificant result of female managerial buy, which indicates that managers have almost market timing ability. Otherwise, the results of event study don’t support information hierarchy hypothesis. The market seems to view sell signals as a more credible signals about firm future prospects than purchase signals. To get a clearer picture, the paper analyzed the post event cumulative average abnormal returns (CAARs) after controlling for the size, value of shares traded, the number of shares traded as a percentage of holding, multiple trade dummies and find that the market reaction to a managerial transaction is neither influenced by the gender of manager nor affected by the category of the manager.(2) By research on the correlation between managerial transaction and the future CAARs in firms, examine whether value overestimated is the incentive for managerial transaction. The results show that there is more statistically and economically significant and negative correlation between whatever three-month and six-month managerial purchase and long abnormal returns after SEOs. Otherwise, the correlation between long abnormal returns and net purchase (difference between purchase and sale) of manager after SEOs is positive. These results are consistent with managerial equity issuing when the value is overestimated, as well as timing to trade their own stock, while showing managers have market timing ability.Otherwise, this paper examines announcement returns of SEOs as well as short term returns after announcement. The results find that there is irrelated to managerial transaction and announcement returns. Howerer, the correlation between short term returns after announcement and managerial sale is statistically and economically significant and negative. When examining net purchase of manager, the similar result is found. So in the short-term time, managerial sale has market timing ability.(3) This paper examines the effect of announcement of managerial purchase or sale on price of stock market. For the sale sample of announcement, results contradict semi-strong form efficienct market hypothesis since an investor is able to earn a significant and negative abnomal returns by acting on the announcement day of managerial transaction and after its trade. However, managers themselves and investors acting on the information prior to the announcement did earn significantly abnormal returns. Evidence here supports the notion than managers do in fact "sell high". However, for the manager purchase sample of firms analyzed, the results support the semi-strong efficienct market hypothesis since an investor is not able to earn abnormal returns by acting on the announcement of managerial transaction and after announcement. Evidence here supports the notion that the managers don’t in fact "buy low"(4) By research on market liquidity in stock market at the day of managerial transaction, according to reference period, the chapter finds that all of managerial transaction and managerial sale have more liquidity improvement in the trading day, which is consistent with our prediction of our managerial sale. However, managerial purchase impairs market liquidity in the trading day but insignificant. Otherwise, finding that the trading volumes are much higher on the day of the managerial transaction, we can therefore conclude that manager seem to trade on days that are very activity, most likely to hide their information based trading in higher trading volumes. These results also support our finding that managers try to time their transaction to trade on days of high liquidity. For the event period following the managerial transaction, the results find that market liquidity following purchase transaction of manager is impaired by manager ownership, as the total manager ownership is increased through the transaction, due to the information asymmetry problem between the managers and other market participants. However, as the sell-transactions decrease the share of manager ownership, an asset liquidity improvement on the days following the manager sell-transaction as the information asymmetry problem is attenuated through the transaction.The contribution of this thesis includes:(1) The existing literature just analyzed market timing ability of managerial transaction from the whole, and the periods is in a short time. The paper analyzed market timing ability and the long and short-term effect of manager classified by gender, category, as well as gender and category in the manager of listed corporation at home, and tested information hierarchy hypothesis. This riches not only the literature of insider trading, but more important thing is that it riches market timing theory.(2) The literatures at home don’t still study market timing ability of managerial transaction from the event of information disclosure in company about SEOs. The paper examined the long and short term effect of information announcement of SEOs in listed corporations on market timing ability of insider trading at the first time at home. This also riches not only the literature of insider trading, but more important thing is that it also riches market timing theory.(3) The paper examined the effect of managerial trading on stock market from the angle of information efficiency and market liquidity, which fills the blank about this facet at home.