Insider Trading and the Exploitation of Inside Information: Some Empirical Evidence

Rule lOb-5 of the Securities Exchange Act of 1934 prohibits the exploitation of inside information by corporate officers, directors, and large stockholders, usually referred to as insiders. The empirical analysis of insider trading has been the subject of several studies (see, e.g., Finnerty 1976b; Jaffe 1974a, 1974; Lorie and Niederhoffer 1968). The focus of most of these studies is whether insiders obtain trading gains from use of inside information. The answer to this question has clear implications for market efficiency: under the semistrong form of the efficient market hypothesis, all public information is fully reflected in prices. Under the strong form of that hypothesis securities prices reflect all relevant information, regardless of what information is publicly available, with the implication that no abnormal profits could be made through the use of inside information (see Fama 1970 for an extensive exposition and discussion of the efficient markets hypothesis).