Does Insider Trading Impair Market Liquidity? Evidence from IPO Lockup Expirations

Quanwei Cao, Laura Casares Field, Gordon Hanka

Research output: Contribution to journalArticle

52 Citations (Scopus)

Abstract

We test the hypothesis that insider trading impairs market liquidity by analyzing intraday trades and quotes around 1,497 IPO lockup expirations in the period 1995-1999. We find that, while lockup expirations are associated with considerable insider trading for some IPO firms, they have little effect on effective spreads. By contrast, two other liquidity measures, quote depth and trading activity, improve substantially. In the 23% of lockup expirations where insiders disclose share sales, spreads actually decline. These findings indicate that a large body of well-informed, blockholding insider traders can enter a market from which they had previously been absent, and substantially change trading volume and share price without impairing market liquidity.

Original languageEnglish (US)
Pages (from-to)25-46
Number of pages22
JournalJournal of Financial and Quantitative Analysis
Volume39
Issue number1
StatePublished - Mar 1 2004

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Insider trading
Market liquidity
Insider
Trading activity
Traders
Trading volume
Liquidity
Effective spread
Share prices

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

Cite this

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abstract = "We test the hypothesis that insider trading impairs market liquidity by analyzing intraday trades and quotes around 1,497 IPO lockup expirations in the period 1995-1999. We find that, while lockup expirations are associated with considerable insider trading for some IPO firms, they have little effect on effective spreads. By contrast, two other liquidity measures, quote depth and trading activity, improve substantially. In the 23{\%} of lockup expirations where insiders disclose share sales, spreads actually decline. These findings indicate that a large body of well-informed, blockholding insider traders can enter a market from which they had previously been absent, and substantially change trading volume and share price without impairing market liquidity.",
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Does Insider Trading Impair Market Liquidity? Evidence from IPO Lockup Expirations. / Cao, Quanwei; Field, Laura Casares; Hanka, Gordon.

In: Journal of Financial and Quantitative Analysis, Vol. 39, No. 1, 01.03.2004, p. 25-46.

Research output: Contribution to journalArticle

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