An event study of potential insider trading in the Saudi stock market

This study assesses the level of potential insider trading on the Saudi stock market (Tadawul) before and after the introduction of financial reforms. The level of potential insider trading is estimated by employing the market cleanliness measure (MCM) which determines the proportion of significant announcements (SAs) that were preceded by abnormal pre-announcement price movements (APPMs). The analysis was carried out using an event study approach to gauge the impact of an event on a security return. The market model is used to estimate the expected return which is subsequently compared with the actual return. The findings suggest the existence of significant abnormal returns surrounding 128 out of 1,958 unscheduled announcements made by firms listed on Tadawul from 2011 to 2020. The MCM shows that 56.36% of SAs were preceded by APPMs during the pre-financial reforms period whereas the ratio dropped to 45.2% over the post-financial reforms period. Although the findings suggest a reduction in the MCM by 11.16%, the statistics for the subsequent period was not statistically lower than the preceding period. The present study establishes a fundamental basis for tracking the efficacy of new regulations in deterring insider trading activities. This study provides empirical evidence and implications that can be taken into consideration by all parties concerned with illegal insider trading and market integrity.In view of the significance of market integrity and fairness, it is important to identify the consequences of impairments to market integrity and insufficient deterrence of insider trading. The findings of the study may be beneficial in driving regulators’ enforcement mechanisms for strengthening market surveillance and combating market misconduct by more actively implementing disciplinary actions. In addition, sequential reviews and assessments have been called for since the launch of Saudi Vision 2030 to ensure the delivery of its financial reform plans. Apart from its policy implications, the study is of interest to policymakers as it offers a foundation for regulatory bodies to determine whether further regulations are needed to strengthen regulatory performance and promote market discipline. Second, the results may be of interest to firms seeking to ensure proper functioning to accurately maintain material-sensitive information and regulate its release through appropriate channels.