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SEPTEMBER 1988 Insider Holdings and Perceptions of Information Asymmetry: A Note RAYMOND CHIANG and P. C. VENKATESH* RESEARCHERS FOUND THAT trades by corporate insiders yield excess profits HAVE (for example, Finnerty [9] and Jaffe [ l l ] ) . In an efficient capital market, we should expect other market participants to consider this in their investment/ trading decisions. Demsetz [7] notes that, to protect themselves, ordinary (uninformed) investors may adopt a buy-and-hold strategy but incur the âcost of illiquidityâ in doing so. Therefore, he argues, the recorded rates of return (measured before losses to insiders) should be higher for stocks more likely to present outsiders with informationally disadvantageous trades. Based on a 159firm sample, he finds that there is a significant positive correlation between the recorded market rates of return and the ratio of insider trading to total trading. In this paper, we study the marketâs perception of information asymmetry between insiders and outsiders through the behavior of another group of tradersthe dealers/specialists. The degree of information asymmetry is proxied here by the concentration of insider holdings. The dealer/specialist provides the trading public the service of immediacy by standing ready to buy and sell. He or she
The Journal of Finance – Wiley
Published: Sep 1, 1988
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