Inside trading and corporate governance in Thailand.

Abstract

The main purpose of this paper is to construct an effective corporate governance index that can show the true governance level of any firm. The study investigates the abnormal returns from insider trading in Thailand and explores the effective corporate governance mechanisms that are able to discourage such trading. The research finds out that insider trading leads to abnormal returns on purchase transaction based on transaction-level data collected in Thailand during 2009-2012. Moreover, the research finds out that the equity market takes around three months to fully reflect the stock value after the public announcement of the insider trade, which can be used to show the level of market efficiency in Thailand. It also illustrates that the independence of the board and the audit committee meetings, as well as the block and institutional holdings play a very effective role as corporate governance mechanisms in limiting such abnormal returns from insider trading. This relationship is more pronounced with trading conducted by insider themselves and larger trades. The research shows governance mechanisms that really work and offer clear guidance to regulators on how to prevent insider trading, that will benefit investors who are looking for better transparency and effective corporate governance.

KEY WORDS: Insider trading abnormal return/ information asymmetry/ CGR