SEPTEMBER 1976 INSIDERS AND MARKET EFFICIENCY JOSEPH E. FINNERTYÂ· I. INTRODUCTION THE STRONG-FORM of the efficient market hypothesis assumes all available public and private information is fully relected in a security's market price. The strongform, in terms of market participants, also assumes that no individual can have higher expected trading profits than others because of monopolistic access to information. One possible test of the strong-form is to determine whether insiders earn better than average profits from their market transactions. To ascertain if the market is truly efficient will involve determining how well insiders do relative to the market in general. To date, some work has already been done in evaluating rates of return earned by insiders trading for their own accounts. Jaffe [3,4], Pratt and DeVere , Rogoff , and Glass  have calculated rates of return earned by insiders trading for their own accounts and their work lends some support to the hypothesis that insiders do, in fact, earn above average profits. A major shortcoming of these studies centers on data availability, as no precise price per share or date of insider trades were reported to the S.E.C. prior to 1965. Further, except for Jaffe, the studies
The Journal of Finance – Wiley
Published: Sep 1, 1976
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