Trading by insiders in Australia: Evidence on the profitability of directors' trades

Do Australian corporate insiders profit from their trades? We answer this question by examining the empirical relationship between directors’ trades (in shares of their own companies) and abnormal share price movements before and after the trades, for a sample of 1,526 “purchases” and 940 “sales” of ASX-listed shares made between January 1996 and June 2000. Directors’ sales, especially of resource stocks, have been profitable in the sense that, by selling, they have avoided significant future losses; but the majority of their purchases do not appear to have been timed to capture future abnormal price rises, contrary to United States insiders’ trades. Australian directors have not profited significantly from the information asymmetry usually ascribed to managers of smaller firms, and the size of the trade has been unrelated to the subsequent abnormal return.