||Insider Trading and Stock Market Reactions to Announcements of Capital Reduction
||Institute of International Management (IIMBA--Master)(on the job class)
In the past, companies listed on the Taiwan Stock Exchange usually conducted Seasoned Equity Offerings (SEO) to take advantage of valuable investment opportunities. This phenomenon has gradually shifted to companies reducing capital because, by the end of the 1990’s, many Taiwanese companies started to see decreasing profits and an over-issue of shares.
This research was conducted through use of event study methodology to calculate abnormal returns under different types of capital reduction. In terms of making up for losses, the event day abnormal returns are -0.4253% which is significant at the ten percent level. The market shows a positive response with 0.3155% abnormal returns after one day of the event day regarding share repurchases, which is significant at the one percent level. For firms returning capital to shareholders, the market has a noticeable positive response. The event day shows positive abnormal returns of 0.9590% significant at the ten percent level.
To explore the real meaning behind capital reduction, insiders’ behavior will be observed for the twelve months preceding the capital reduction announcement. The report finds that making up for losses and share repurchases are associated with insiders abnormal selling their firm’s share. However, the result for returning capital to shareholders is positive, which indicates that insiders will buy. Our results demonstrate for making up for losses and returning capital to shareholders that abnormal trading by insiders is in accordance with the expected market reaction.
TABLE OF CONTENTS IV
LIST OF TABLES VI
LIST OF FIGURES VII
CHAPTER ONE INTRODUCTION 1
1.1 RESEARCH BACKGROUND AND MOTIVATION 1
1.2 RESEARCH OBJECTIVES 3
1.3 RESEARCH STRUCTURE 3
CHAPTER TWO LITERATURE REVIEW 5
2.1 DIFFERENT TYPES OF CAPITAL REDUCTION 5
2.1.1 Making up for Accumulated Losses 5
2.1.2 Repurchasing Shares 6
2.1.3 Returning Capital to Shareholders 9
2.2 INSIDER TRADING 11
2.3 INSIDER TRADING AND STOCK MARKET REACTIONS TO ANNOUNCEMENTS OF CAPITAL REDUCTION 13
2.4 HYPOTHESIS DEVELOPMENT 15
CHAPTER THREE RESEARCH DESIGN AND METHODOLOGY 18
3.1 DATA SOURCES AND SAMPLE 18
3.2 EMPIRICAL METHODOLOGY 20
3.2.1 Method for Measuring Capital Reduction 20
3.2.2 Method for Measuring Abnormal Insider Trading 23
3.3 MEASUREMENT OF CAPITAL REDUCTION AND INSIDER TRADING 25
3.3.1 Empirical Model for Capital Reduction 25
3.3.2 Measuring Abnormal Insider Trading 28
3.4 THE RELATIONSHIP BETWEEN CAPITAL REDUCTION AND INSIDER TRADING 30
CHAPTER FOUR EMPIRICAL RESULTS 31
4.1 EMPIRICAL TEST OF ABNORMAL RETURNS FOR CAPITAL REDUCTION 31
4.1.1 Summary Statistics for Capital Reduction 31
4.1.2 Abnormal Returns of Firms Following Capital Reduction Announcement 35
4.1.3 Multiple Regression Analysis of Capital Reduction 37
4.2 EMPIRICAL TEST OF ABNORMAL INSIDER TRADING SURROUNDING CAPITAL REDUCTION ANNOUNCEMENT 39
4.2.1Descriptive Statistic for Insider Trading 39
4.2.2 Multiple Regression Analysis of Abnormal Insider Trading 41
4.3 MULTIPLE REGRESSION ANALYSIS OF CUMULATIVE ABNORMAL RETURNS AND INSIDERS TRADING SURROUNDING CAPITAL REDUCTION 44
CHAPTER FIVE CONCLUSTION 47
5.1 CONCLUSION 47
5.2 LIMITATIONS 50
5.3 SUGGESTIONS FOR FUTURE RESEARCH 51
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