The impact of firm size and industry on director dealing profitability: evidence from the Johannesburg Stock Exchange

• Main Author: Gallagher, Delano
• Other Authors: Toerien, Francois
• Format: Dissertation
• Language: English
• Published: University of Cape Town 2017
• Subjects: Financial Management
• Online Access: http://hdl.handle.net/11427/22916

The purpose of this study is to investigate whether abnormal returns are earned on insider trading on the Johannesburg Stock Exchange (JSE). The study first tests the strong form of the Efficient Market Hypothesis by investigating whether abnormal returns are earned by directors purchasing or selling their own firms' shares, and thereafter the semi-strong form of the Efficient Market Hypothesis by investigating the occurrence of abnormal returns earned by outsiders mimicking these director transactions once they are publically announced (which has to be within 48 hours). In addition, this study tests whether these abnormal returns are dependent on firm size, and secondly whether a firm's industry classification, as defined by the JSE, has an effect on the magnitude of abnormal returns earned by directors and outsiders mimicking these transactions. Event study methodology, in conjunction with the Market Model, is used to calculate the abnormal returns for a sample of 1,026 directors' trades made on the JSE between 2007 and 2012. The results indicate that directors in many of the subsamples tested earn statistically significant abnormal returns in the short term (defined as 20 days post the event date), when purchasing or selling shares in their own companies, although more so on sale trades. There is strong evidence of directors being able to time the market, and that outsiders can mimic directors' trades once these become public knowledge to also earn abnormal profits. These findings are inconsistent with both the strong and semi-strong forms of market efficiency. The study further finds a negative correlation between abnormal returns earned and firm size for both director share purchases and sales. This supports the theory that insiders in smaller companies, which are less exposed to market scrutiny than larger firms, possess greater private information than their counterparts in larger listed businesses. Finally, it is found that the highest insider abnormal returns were earned by director purchases in the Basic Materials and Oil & Gas sector, with the lowest abnormal returns earned in the Consumer Goods and Technology and Telecommunications sectors. The findings of this study have both theoretical implications in terms of the market efficiency of the JSE, as well as practical insights for investors looking for a profitable trading strategy based on director trades.