Background:

Studying insider trading is difficult due to its sensitive and delicate nature. Therefore it is hard to gauge the extent of such activities. This problem has resulted in a fierce debate whether it should be prohibited or not. Using a method where the effect on monopolistic information usage can be isolated insider trading can be monitored. Such an event is a profit warning.

Purpose:

This paper examines whether insider trading exist for companies

making a profit warning between year 2003 and 2007 on the Stockholm

Stock Exchange. Furthermore the aim with the study is to contribute

to the debate on the insider trading legislation.

Method:

The study’s purpose is achieved through an event study studying the

cumulative abnormal return as well as average daily returns during

the thirty days preceding the warning for a sample of thirty companies.

Since profit warnings should be completely random and as such

almost impossible for the market to know in advance, a significant

abnormal return can only be explained with insider trading. The abnormal returns were calculated using the Capital Asset Pricing Model

since it is the most widely used model.

Conclusion:

For the chosen time frame, when testing on a 95% significance level,

the study found a significant abnormal return during the last 10 days

of the event window but not for the entire period of thirty days. The

daily average return for the thirty companies were significant for six

of the thirty days within the event window. Two of them were included

in the last ten day period with a confirmed significant abnormal

return which might suggest that on average insider trading tend

to occur during these days. The other four was discarded due to

sample issues. Since the study was limited to a period of four years

extending the results to a period other than tested should be made

with great care since conditions may differ over time. Concerning the

current debate on the insider legislation, the findings can be used by

both sides. Either to argue for a strengthening of the law or to question its existence.