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

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dc.contributor.advisorToerien, Francoisen_ZA
dc.contributor.authorGallagher, Delanoen_ZA
dc.date.accessioned2017-01-23T07:55:43Z
dc.date.available2017-01-23T07:55:43Z
dc.date.issued2016en_ZA
dc.description.abstractThe 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.en_ZA
dc.identifier.apacitationGallagher, D. (2016). <i>The impact of firm size and industry on director dealing profitability: evidence from the Johannesburg Stock Exchange</i>. (Thesis). University of Cape Town ,Faculty of Commerce ,Department of Finance and Tax. Retrieved from http://hdl.handle.net/11427/22916en_ZA
dc.identifier.chicagocitationGallagher, Delano. <i>"The impact of firm size and industry on director dealing profitability: evidence from the Johannesburg Stock Exchange."</i> Thesis., University of Cape Town ,Faculty of Commerce ,Department of Finance and Tax, 2016. http://hdl.handle.net/11427/22916en_ZA
dc.identifier.citationGallagher, D. 2016. The impact of firm size and industry on director dealing profitability: evidence from the Johannesburg Stock Exchange. University of Cape Town.en_ZA
dc.identifier.ris TY - Thesis / Dissertation AU - Gallagher, Delano AB - 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. DA - 2016 DB - OpenUCT DP - University of Cape Town LK - https://open.uct.ac.za PB - University of Cape Town PY - 2016 T1 - The impact of firm size and industry on director dealing profitability: evidence from the Johannesburg Stock Exchange TI - The impact of firm size and industry on director dealing profitability: evidence from the Johannesburg Stock Exchange UR - http://hdl.handle.net/11427/22916 ER - en_ZA
dc.identifier.urihttp://hdl.handle.net/11427/22916
dc.identifier.vancouvercitationGallagher D. The impact of firm size and industry on director dealing profitability: evidence from the Johannesburg Stock Exchange. [Thesis]. University of Cape Town ,Faculty of Commerce ,Department of Finance and Tax, 2016 [cited yyyy month dd]. Available from: http://hdl.handle.net/11427/22916en_ZA
dc.language.isoengen_ZA
dc.publisher.departmentDepartment of Finance and Taxen_ZA
dc.publisher.facultyFaculty of Commerceen_ZA
dc.publisher.institutionUniversity of Cape Town
dc.subject.otherFinancial Managementen_ZA
dc.titleThe impact of firm size and industry on director dealing profitability: evidence from the Johannesburg Stock Exchangeen_ZA
dc.typeMaster Thesis
dc.type.qualificationlevelMasters
dc.type.qualificationnameMComen_ZA
uct.type.filetypeText
uct.type.filetypeImage
uct.type.publicationResearchen_ZA
uct.type.resourceThesisen_ZA
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