This study aims to measure the magnitude of information asymmetry between insiders and outsiders in Indian equity market. The study also investigates the effect of major information sources that affect information asymmetry namely, the informativeness of financial statements, news reports about the company and analyst follow-up.
Six-month profitability of insider trade was used as the proxy to measure information asymmetry. Fama-MacBeth two-stage regression was used to analyse the effect of information sources upon information asymmetry.
The results of the analysis demonstrate that in comparison with findings of similar studies the level of information asymmetry is comparatively high in India. On an average, profitable insider traders in India earn 19.28 per cent return than outside investors. Purchase transactions are more profitable than sales transactions, while the size of company and information asymmetry is associated inversely. Further, news and analyst follow-up are inversely associated with information asymmetry whereas informativeness of financial statements has little effect on information asymmetry.
The study have important insights for corporates in insider information management and legal compliance of insiders’ market activities. Results pointing to the requirements of a deeper Regulatory monitoring and stringent legal framework.
The result validates the concerns of investor protection against informed trade.
The measurement of information asymmetry using profitability of insider trade is novel in Indian context even though the methodology is often used in the literature.
