Quantitative trading strategies : an analysis on director trading in Malta : is it a profitable trading strategy?

Abstract

Director Dealings has been a topic of interest to numerous categories of people and over the years there have been a vast number of studies on the subject, particularly if directors can earn abnormal returns by trading in their own firms and whether outsiders can also make such a return just by trading like directors. It can be said that the trades of directors convey valuable information given that they have insider knowledge. This thesis investigates director trades on the Maltese Stock Exchange to determine whether or not the trades of directors contain a good level of information and also whether the said information would enable outsiders to earn profits by mimicking their trades. This is being studied in order to establish whether director trades can provide information to investors about the future prospects of the company and thus reduce the information asymmetry beyond what is already conveyed in the financial statements. This analysis is carried out on reported transactions executed by directors between the periods of January 2005 up to December 2014. The results show that in the short-term period of up to 12 months after the transaction date, Maltese directors do transmit information to the market both when they purchase shares in their own companies and also when they sell shares. The interesting fact about the study is that in Malta sale transactions are more valuable to the outsiders than purchase transactions with regards to the information they portray. Apart from this, the results also show that some companies which are listed on the Malta Stock Exchange are more indicative as to their future performance than others. It was ultimately concluded that even though there are informational asymmetries between directors in a company and outsides, an outsider cannot trade solely by following director trades.