Insider trading, growth opportunities and the market reaction to new financing announcements

The paper examines three hypotheses about the effect of insider trading on the market response to new financing announcements (NFAs) using a sample of disclosures made by UK firms between 1989 and 1991. The study demonstrates first that no systematic relationships exist between the market response to NFAs and pre-announcement insider trading. Second, contrary to the predictions of John and Mishra (1990), the values of growth indicators do not differ significantly between firms that are subject to insider buying and selling prior to NFAs. Third, while there is some evidence to suggest that insider trading and growth prospects influence the market reaction to debt issue announcements, the evidence is not pervasive across growth measures and does not extend to equity issues. This final result helps to resolve an apparent contradiction between the signalling models of John and Mishra (1990), and John and Lang (1991), and suggests that prior studies of the market reaction to NFAs are not significantly flawed by their failure to consider the signalling role of pre-announcement insider trading. The findings are also shown to be relevant to the current debate about whether, and how, insider trading regulations should be tightened.