1. m.a.lasfer@city.ac.uk Does Cross-Listing Mitigate Insider Trading? Adriana Korczak and Meziane Lasfer Cass Business School, London

2. m.a.lasfer@city.ac.uk 2 Introduction Evidence that insiders trade profitably around major corporate events using private information –Bankruptcy protection: Seyhun & Bradley (1997) –New issues: Karpoff and Lee (1991) –Buybacks: Lee, Mikkelson & Partch (1992) –Earnings forecasts: Penman (1982) –Takeovers: Seyhun (1990), Bris (2005) –Dividend announcements: John and Lang (1991) –Exchange listings/de-listings: Lamba and Khan (1999) Evidence that insiders earn significant exceptional returns –US: Jaffe (1974), Finnerty (1976), Seyhun (1986), Lakonishok and Lee (2001) –U.K: Pope et al (1990), Gregory et al (1994) & in other countries… But is Insider Trading profitable after transaction costs?

3. m.a.lasfer@city.ac.uk 3 Issues: Should insider trading be regulated? What and How to regulate – Controversies: –What is insider trading and who is the insider –How to treat non-information trading (e.g., portfolio changes, liquidity) and trading on miss-valuation Insider trading should not be regulated because: –It increases market efficiency, thus, Prices will reflect all information – Closer to strong form EMH Signalling Buy (sell) trades to signal under- (over-) valuation Insider trading should be regulated because: –Trading on private information implies transfer of wealth –Decrease market efficiency through Reduction in liquidity Informed investors set up strategies to mimic insider trades

4. m.a.lasfer@city.ac.uk 4 Objective of the paper Test whether cross-listing mitigates the trading on insider information The legal and reputational bonding hypotheses UK and US roughly same governance, thus not testing the bonding hypothesis as defined by (Cofee 1999, 2002; Stulz, 1999) Cross-listed companies are subject to both domestic and foreign Legislation –US and UK are relatively complementary – Table 1 Increased disclosure requirements Less information asymmetries because more thorough investor monitoring Stronger bad image effects…

5. m.a.lasfer@city.ac.uk 5 Cross-listing Parallel listing on domestic and foreign stock exchanges Particularly popular and widely investigated over the last 15-20 years Listing venue Disclosure requirements Capital raising Rule 144APortalMinimal complianceyes ADR Level IOTCPartial complianceno ADR Level II AMEX / NASDAQ / NYSE Full compliance no ADR Level IIIyes

6. m.a.lasfer@city.ac.uk 6 Data Source –Insider trading - Director Deals Ltd. –Cross-listing - BoNY, NASDAQ/NYSE/AMEX –Stock prices, accounting data and news - Perfect Analysis Sample –1999-2003 –928 UK companies (CL = 115, 12%) –Total number of observations - N ALL =13,529 (CL = 18%, Buy ALL = 78% (CL = DL))

7. m.a.lasfer@city.ac.uk 7 Description of the data (1) Table 2 Cross-Listed Cos (CL) Domestically-Listed Companies (DL) t CL – DL Mann- Whitney Panel B Fundamentals (Firm-Years) Buy Trades Market Cap (£m) Dividend Yield M/B ROA 19,512 5.00 7.78 0.03 4,845 3.91 1.99 0.04 871 5.17 2.31 0.02 143 4.28 1.41 0.01 18.77 -1.10 2.18 4.71 0.00 Sell Trades Market Cap (£m) Dividend Yield M/B ROA 18,011 2.97 19.56 0.07 5,642 2.45 3.07 0.07 639 3.22 3.25 0.03 170 2.40 2.25 0.02 10.27 -0.94 1.78 11.41 0.00 0.36 0.00 Mean Median

8. m.a.lasfer@city.ac.uk 8 Description of the data (2) Table 2 CL DL Mean Median Mean Median t MW

9. m.a.lasfer@city.ac.uk 9 Methodology Event study methodology –Event day [day 0] Insider trading announcement date Insider trading date –Event window [-100; +100] Estimation window [-360; -101] News announcements Regressions – –OLS –To account for fundamental characteristics of cross- listed firms (Reese and Weisbach, 2002; Doidge et al., 2004): Larger, higher growth and profitability 2SLS and 2-stage Heckman estimation (Heckman, 1978)

10. m.a.lasfer@city.ac.uk 10 Summary of the results Buy Trades CL DL CL

11. m.a.lasfer@city.ac.uk 11 Empirical Results

12. m.a.lasfer@city.ac.uk 12 OLS Regressions

13. m.a.lasfer@city.ac.uk 13 Regressions – Selectivity Bias

14. m.a.lasfer@city.ac.uk 14 Robustness checks Confounding events [-5, +5] –Same results Announcement day vs. Trading day –Similar results –Announcement dates provide more information than trading dates Bull vs. bear markets –Cross-listed companies: More information in bear period –More differences in domestically-listed firms Alternative event study methodologies –Same results using market adjusted model, mean adjusted model… Control sample – Size effect, similar results

15. m.a.lasfer@city.ac.uk 15 Impact of News Announcements Pre-event – Buy trades

16. m.a.lasfer@city.ac.uk 16 Impact of news announcements Post-event – Buy trades

17. m.a.lasfer@city.ac.uk 17 Impact of news: Pre-Sell trades

18. m.a.lasfer@city.ac.uk 18 Impact of news: Post-Sell Trades

19. m.a.lasfer@city.ac.uk 19

20. m.a.lasfer@city.ac.uk 20 Conclusions Insiders are informed investors because –They are contrarians: Negative (Positive) CARs before buy (sell) trades –Positive (negative) CARs after buy (sell) trades Significant differences between cross-listed and domestically-listed companies –Abnormal returns and –news impacts are significantly smaller for cross-listed firms Implication: –bonding contract limits the propensity of insiders to trade on insider information Coffee (1999), Reese and Weisbach (2002), Doidge (2004) and Doidge, Karolyi and Stulz (2004)

21. m.a.lasfer@city.ac.uk 21 Questions Why do managers still trade before news is announced, despite the legal constraints? –Is the bonding contract not binding? King and Segal (2004), Segal (2005) and Licht (2003) –Use other markets US domestic vs. UK cross-listed companies Other cross-listed companies in US –Use other news, especially financial analysts forecasts Market micros-structure effect –Bid-ask spread – adverse selection problem