CAN INSIDERS BENEFIT FROM A PANDEMIC CRISIS? A quantitative study of the impact of COVID-19 on insider trading profitability in a Swedish setting

Abstract: The COVID-19 crisis includes unprecedented stock market impacts, exceptional uncertainty and explicit concerns from authorities that insiders possess information other than the public during the dynamic circumstances brought by the pandemic. While previous research finds clear evidence that insiders can earn abnormal profits from insider trades, few studies direct their attention towards insider trading profitability during volatile and uncertain market conditions. Additionally, there are gaps in the literature on whether the position of the insider within the firm, or whether the trade is conducted by a related person, has an impact on abnormal profitability. This study complements these scarce research areas by adopting a quantitative approach to investigate the impact of the unique COVID-19 crisis on the abnormal profitability of insider trades in Sweden, which is a relatively unexplored market in the context of insider trading. By conducting an event study on a sample of insider transactions, involving stocks of Swedish listed firms, this study sets out to answer the following research question: how does the COVID-19 crisis impact the profitability of insider purchases and sales on the Swedish stock market? We find that the COVID-19 crisis impacts the profitability of insider purchases negatively in general and the profitability of sales positively in general. The results imply that while the exceptional uncertainty brought by the pandemic makes it difficult for insiders to conduct privately informed purchase transactions to earn money, sales may not be as affected by the uncertainty as they are more likely conducted for liquidation or diversification purposes. Further, the results show that the position of the insider does not have a significant impact on the profitability of insider transactions during the pandemic, with two exceptions. As for insiders in general, we document that the COVID-19 crisis impacts the profitability of insider purchases by board members negatively and the profitability of insider sales by officers positively. Likewise, the results show that the pandemic impacts the profitability of related persons’ purchases in a similar manner as for insiders in general.