Explaining Abnormal Returns from Insider Purchases A study on insider purchases in large vs small cap firms

Abstract

This study examines insider trading with the purpose of investigating if insider purchases on publicly traded Swedish firms generate abnormal returns. The study also focuses on whether abnormal returns differ depending on specific firm- and market-variables. The analysis is based on insider purchases between 2022 and 2024, using event study methodology to calculate cumulative abnormal returns for the two groups: large and small cap firms. A 200-day estimation window and a 8-day event window are applied to capture the entire effect of the insider purchase. In addition, regression analysis is used to investigate if the variables; insider position, trade value, and market volatility, can explain the variation in abnormal returns. The results show that insider purchases are followed by statistically significant positive abnormal returns, with small cap firms generating significantly higher Cumulative Abnormal Returns (CAR). Regression findings indicate that insider position, trade value, and volatility significantly influence the size of abnormal return, also suggesting that insider purchases are a stronger signal in small cap firms with greater information asymmetry. The results contribute to the existing literature by using recent data to show that abnormal returns exist in the Swedish markets and are larger in small cap firms.