Insider trading in politically connected firms : an evidence from Thailand

Abstract

Political connection can heavily affect the financial performance of a firm. Firms that are connected to a government official can benefit from various regulations, tax breaks, and concessions while firms that are connected to the opposition might suffer. Empirical results from various studies conclude that political connection is a significant factor in explaining excess return in listed firms. This study compares trading behavior of connected and unconnected during four categories of events which are change in government, change in public policy, display of favoritism, and unfavorable events. Market transaction and insider transaction data between 2001 and 2008 is obtained from the Stock Exchange of Thailand and the Securities Exchange Commission of Thailand respectively. This research uses cumulative abnormal return as proxy for excess return. Additionally the probability of information-based trading, buy-sell imbalance, and frequency imbalance is used as proxy for trading behavior. This study found that there is excess return in some political events and that insiders trade opportunistically to maximize profit (minimize loss). It can be concluded that not all type of political events are significant and that insiders sometimes trade before material information becomes public.