Insider Trading, Stock Volatility, and Market Liquidity in the Korean Capital Market

Abstract

While the positive and negative effects of insider trading have been discussed in the each firm levels, there is little evidence for the effects of insider trading on financial markets. This paper aims to provide empirical evidence for the effects of insider trading in the capital market. This study examines the association between insider trading and information asymmetry in firms with certain information environments. If capital market regulation for insider trading is effective and companies are well-governed, the positive rather than negative effects of insider trading in the capital market will be enhanced. The empirical results indicate that insider selling (buying) in firms with high ratios of foreign share ownership is associated with a decrease in stock volatility (market liquidity). The results in this paper enables policy makers and practitioners to understand the impact of corporate insider trading on outsiders in the capital market. Our findings may also help to reform regulation of insider trading as it is applied in real business environments, especially in firms with high levels of information asymmetry.

Keywords

• discretionary accruals
• information asymmetry
• insider trading
• market liquidity
• stock volatility