Insider employee stock option trading and stock prices



McMillan D, Tavakoli M & McKnight PJ (2014) Insider employee stock option trading and stock prices. European Journal of Finance, 20 (1), pp. 59-79.

We examine the information content of insider employee stock option trading and its value to market investors using a US dataset. There should be no presumption that option trading would not convey valuable information and indeed, the exercise of option rights is likely to signal insider knowledge. Our results from Granger-causality tests suggest that the actions of directors, officers (senior management) and the other groups, such as company lawyers, do indeed have predictive power for future returns. However, the actions of large shareholders have no additional information content over that which is publicly available. Evidence from predictive regressions largely supports these results, but is often weaker in significance. This seems to arise as the Granger-causality approach utilises a longer lag length and suggests that it takes time for the market to assimilate the information from insider actions. Overall, the results suggest that any outsider who can mimic the behaviour of certain insider groups could benefit in predicting future returns. Finally, the results confirm the belief that the market is unlikely to be strong-form efficient and that this is particularly true with smaller firms. In contrast, larger firms appear to be priced more efficiently than smaller ones.

insider trades; employee stock option; abnormal returns; market efficiency

European Journal of Finance: Volume 20, Issue 1

Publication date31/12/2014
Publication date online06/06/2012
Date accepted by journal23/02/2012
PublisherTaylor and Francis

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Professor David McMillan
Professor David McMillan

Professor in Finance, Accounting & Finance