Insider trading: Is the regulatory change a toothless tiger?

Abstract

No investor should be able to use private information for his/her own benefit. Market regulation is a crucial part of well functioning financial markets. To improve the efficiency of the Swedish stock market Finansinspektionen revised the Swedish insider trading laws in August 2005 making it illegal to make insider trades the month before semi-annual and annual reports. The purpose of this thesis is to examine whether the revision has fulfilled its purpose and reduced abnormal return for insiders. Approximately eleven thousand insider buy transactions have been investigated on the Stockholm stock exchange during three years before and after the new law was implemented. Our results show that there are positive abnormal returns before and after the regulatory change. However, these abnormal returns are lower after the law was implemented. We can conclude that the law has fulfilled its purpose to reduce the possibility for insiders to make a profit from their informational advantage.