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H. JONATHAN J A N C AND MARTIN LOER* P. INTRODUCTION In the United States, section 16a of the Securities and Exchange Act of 1934 requires corporate officers, directors, or shareholders owning 10% or more of the voting common stock of a corporation to report to the SEC stock transactions in their own company within ten days of the end of the month of the trade. The groups required to report stock transactions provide a narrow definition of a firmâs corporate insiders. Evidence that corporate insiders earn abnormal returns from trading the securities of their own firm comes from studies showing that stock purchases by insiders are generally followed by a significant increase in stock price while sales are generally followed by a significant drop in stock price. These abnormal profits have been attributed by many researchers to insidersâ use of their superior information in trading (see Lorie and Niederhoffer, 1968; Jaffe, 1974 and Finnerty, 1976; among others). Insider profits, as documented in the studies listed above, do not provide clear evidence about whether an average insider is involved in illegal activity. The reported profits, first of all, seem small. For example, Seyhun (1986), who analyzed a large
Journal of Business Finance & Accounting – Wiley
Published: Jun 1, 1995
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