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

Alqurayn, Abdulrhman; Kulendran, Nada; Ihalanayake, Ranjith Article An event study of potential insider trading in the Saudi stock market Cogent Economics & Finance Provided in Cooperation with: Taylor & Francis Group Suggested Citation: Alqurayn, Abdulrhman; Kulendran, Nada; Ihalanayake, Ranjith (2024) : An event study of potential insider trading in the Saudi stock market, Cogent Economics & Finance, ISSN 2332-2039, Taylor & Francis, Abingdon, Vol. 12, Iss. 1, pp. 1-18, https://doi.org/10.1080/23322039.2024.2367368 This Version is available at: https://hdl.handle.net/10419/321520 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ Cogent Economics & Finance ISSN: 2332-2039 (Online) Journal homepage: www.tandfonline.com/journals/oaef20 An event study of potential insider trading in the Saudi stock market Abdulrhman Alqurayn, Nada Kulendran & Ranjith Ihalanayake To cite this article: Abdulrhman Alqurayn, Nada Kulendran & Ranjith Ihalanayake (2024) An event study of potential insider trading in the Saudi stock market, Cogent Economics & Finance, 12:1, 2367368, DOI: 10.1080/23322039.2024.2367368 To link to this article: https://doi.org/10.1080/23322039.2024.2367368 © 2024 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group Published online: 25 Jun 2024. Submit your article to this journal Article views: 926 View related articles View Crossmark data Citing articles: 3 View citing articles Full Terms & Conditions of access and use can be found at https://www.tandfonline.com/action/journalInformation?journalCode=oaef20 FINANCIAL ECONOMICS | RESEARCH ARTICLE An event study of potential insider trading in the Saudi stock market Abdulrhman Alqurayn # , Nada Kulendran and Ranjith Ihalanayake Victoria University, Melbourne, Australia ABSTRACT 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. IMPACT STATEMENT 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 materialsensitive information and regulate its release through appropriate channels. ARTICLE HISTORY Received 31 January 2023 Revised 20 May 2024 Accepted 9 June 2024 KEYWORDS Insider trading; informed trading; event study methodology; market cleanliness measure; abnormal returns; Insider trading; event study methodology; abnormal returns REVIEWING EDITOR Xibin Zhang, Econometrics and Business Statistics, Monash University, Caulfield East, Australia SUBJECTS Economics; Finance; Business, Management and Accounting; Financial Markets; Corporate Finance; Governance 1. Introduction Information on securities markets is a motivating force for the trading operations of market participants. Unlike public information, private information provides a unique advantage for certain market participants, usually corporate insiders, who possess superior access to such information compared to other market participants (John & Lang, 1991; Yin & Zhao, 2015). The impact of private information involves being composed of material price-sensitive information. This in turn can incentivize insiders to exploit the foreknowledge of their firms’performance and enable them to earn excess returns (Keown & Pinkerton, 1981; Lee, 2021). An extensive body of literature on illegal insider trading has documented CONTACT Abdulrhman Alqurayn [email protected] Victoria University, Melbourne, Australia # Present address: King Khalid University, Al Fara, Abha, 62223, Kingdom of Saudi Arabia. ß2024 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group This is an Open Access article distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. The terms on which this article has been published allow the posting of the Accepted Manuscript in a repository by the author(s) or with their consent. COGENT ECONOMICS & FINANCE 2024, VOL. 12, NO. 1, 2367368 https://doi.org/10.1080/23322039.2024.2367368 that the financial markets are structured on trust and that the abuse of the possession of private information impairs that trust and thus raises concerns about market integrity and efficiency (Monteiro et al., 2007; Carvajal & Elliott, 2009; Dalko & Wang, 2016). The prevalence of insider trading in Tadawul has raised questions about the integrity of the market and the potential effect of such practice on undermining investors’confidence. In 2018, the Saudi Capital Market Authority (CMA) imposed 129 penalties on 249 violators of rules and regulations. Penalties for insider trading were the highest, totalling more than 86 million USD. 1 In August 2021, the CMA referred a group of more than 250 individuals to the Public Prosecution charged with disclosing inside information for listed firms on social media. 2 The media, however, have expressed concern over the pervasiveness of insider trading due to the abundant rumours circulating within Tadawul. These are critical issues that could discourage investors’participations, influence the market liquidity and worsen stock price informativeness (Bhattacharya & Daouk, 2009; Collin-Dufresne & Fos, 2015; Kim et al., 2019; Ahern, 2020). The CMA though affirms that the Capital Market Law (CML) and its implementing regulations prohibits insider trading and considers it as a criminal offense in Saudi Arabia. The Saudi government has taken tremendous steps to develop its economy through financial reforms, broadly referred to as Saudi Vision 2030, which was adopted in 2016. The reforms plans were accompanied by a more elaborate program called the Financial Sector Development Program (FSDP). One purpose of the FSDP is to develop effective financial institutions to support the growth of the capital market and qualify Tadawul to become an advanced capital market. Therefore, the CMA has undertaken crucial initiatives that include loosening ownership limits for foreign investors to attract more investors and amending the Market Conduct Regulations (MCR) which involved extending the scope of insider trading prohibition. Despite millions of dollars in fines imposed on insider traders along with criminal charges brought against hundreds of individuals who implicated in illegal insider trading, such ramifications have heightened concerns about integrity in Tadawul and may threaten the aim of attracting more investors. Motivated by these observations, we attempt to empirically estimate the level of potential insider trading. It may be conjectured that insider trading legislation in Tadawul lacks a sufficient mechanism to deter such misbehaviour. In other words, the low quality of institutions, weak enforcement of insider trading laws, or minimal penalties and sanctions could create space for insiders to engage in market misconduct. These are critical challenges that confront securities regulators to maintain the market discipline and promote the investors’participations. The amount of confidence in the market can affect the amount of financing that can be raised through the stock market (Bhattacharya & Daouk, 2002). The amended regulations of MCR are intended to enhance the confidence of investors and tackle market misconduct. However, there is an imperative need to understand more about market abuse in Tadawul, especially illegal insider trading, which has hitherto received little attention of empirical background research. It is, thus, the primary aim of this study to fill this gap by investigating the impact of the new regulatory amendments introduced with the financial reforms on the integrity of Tadawul with a particular focus on potential insider trading. The present study seeks to estimate and compare the market cleanliness measure (MCM) of Tadawul in the periods both before and after the introduction of the financial reforms. There is a lack of studies with respect to the estimation of possible insider trading practice in Tadawul where the most previous empirical studies on Tadawul have focused on the stock price reaction and the market efficiency. For examples, Syed and Bajwa (2018) measured the impact of quarterly earnings announcements on stock prices reaction in Tadawul with the aim of testing the Efficient Market Hypothesis (EMH) and found significant abnormal returns (ARs) several days prior to the earnings announcements. Felimban et al. (2018) examined the stock market response to dividend announcements in Gulf Cooperation Council (GCC) countries, including Tadawul, and suggested the information leakage before the announcements dates. However, these types of dividends and earnings announcements are often prescheduled earlier. Therefore, one may argue that the presence of ARs or information leakage before such events are motivated by informed trading of sophisticated investors that is driven by their information acquisition and/or the information provisions of sell-side analysts (Weller, 2018; Chen et al., 2020). Moreover, the ARs before the aforementioned announcements could be attributable to attentive trading on public information as shown by Alldredge and Cicero (2015)or rather by the fact that the market is mostly being aware of their imminent release. 2 A. ALQURAYN ET AL. Unlike previous studies, we exclude such firms announcements and restrict our sample to unscheduled announcements. These announcements are likely to be a surprise events to the market assuming that they particularly involve a release of information in which the timing is not publicly known, and they are not easily predictable by the market participants. On the other hand, the existence of significant ARs ahead of unscheduled announcements is more likely to be driven by corporate insiders or other forms of suspicious trading activities that rely on material non-public information. This study may be the first that empirically measures the level of potential insider trading activities in Tadawul using a distinct type of major events and more recent data set during a period marked by substantial transformations in the history of Tadawul. This paper extends the prior work of the market cleanliness methodology to answer the research question of whether the new regulatory changes were successful in reducing the occurrence of possible insider trading activities prior to firms announcements on Tadawul. We examined the research question using a sample of 1,958 unscheduled announcements released by the companies listed on Tadawul from 2011 to 2020 (the relevant period). The research hypotheses were tested by performing an event study approach to daily stock returns to examine the extent to which abnormal pre-announcement price movements (APPMs) have taken place before significant announcements (SAs). The analysis is carried out using a statistical model fitted to the time series data. The study will reveal the proportion of APPMs observed prior to SAs over the relevant period. Our paper makes several contributions to the literature and the body of knowledge. The empirical findings of the study are important to policymakers, firms and investors. First, our paper provides a valuable contribution to the understanding of the effectiveness of insider trading laws and their enforcement in Tadawul. The study offers a foundation for regulatory bodies to determine whether additional regulations are needed to strengthen regulatory performance and promote the market discipline. Second, the results can be of interest to firms in ensuring proper function to accurately maintain material-sensitive information and regulate its release through an appropriate channel. Third, the study provides valuable insights to investors about market conditions pertaining to insider trading practises and holds value-adding in the emerging market context as well. The scope of the study is limited to examine abnormal stocks returns; however, an identified limitation involves to not examine abnormal trading volumes. The remainder of this article is structured as follows. Section 2 proceeds with the literature review and hypothesis development. Section 3 presents the data and sample description, while Section 4 describes methodology. Section 5 presents analysis and results, and Section 6 concludes this article. 2. Literature review and hypothesis development A number of prominent scholars in securities law and financial markets have extensively debated of whether the potential benefits of insider trading practice outweigh its drawbacks. In one hand, a vast literature has been devoted on the serious harm that insider trading does to the capital markets fairness, liquidity and stock price informativeness, thus it requires strict regulations (Bhattacharya & Daouk, 2002; Kwabi et al., 2018; Ojah et al., 2020). Another school of thought has argued in favour of insider trading stating that it fosters market efficiency, and it is an efficient method to compensate corporate managers for their entrepreneurial efforts (Manne, 1966; Carlton & Fischel, 1983). It is important to note that not all forms of insider trading are illegal; yet some are entirely legitimate (Shell, 2001; McGee, 2010). Although a longstanding literature debate between the opponents and proponents of insider trading prohibition, illegal insider trading is considered as a criminal conduct in many countries. As a result, most countries have established laws and legislation to prevent market misbehaviours such as insiders abusing their superior knowledge of private information (Bhattacharya & Daouk, 2002; La Porta et al., 2002,2006). 2.1. Insider trading and stock return anomalies Evidence from over three decades of insider trading investigations broadly underpins the assumption that illegal insider trading enables insiders to either gain abnormal profits or avoid potential loss by COGENT ECONOMICS & FINANCE 3 exploiting their privileged information at the expense of other investors (Kyle, 1985; Seyhun, 1986; Barclay & Warner, 1993; Jain et al., 2018; Suk & Wang, 2021). It has been empirically documented that the market can detect insider trading activity as such practice impounds the information into the stock price (Meulbroek, 1992; Bhattacharya et al., 2000). Drawing on firsthand observations of insider trading incidents, Meulbroek (1992) revealed interesting results pertaining to 183 illegal insider trading cases charged by the U.S. Securities and Exchange Commission (SEC) from 1980 to 1989. The author discovered that 43% of price run-ups observed over the 20 days before takeover announcements. In a similar vein, Ahern (2017) examined insider trading prosecutions filed by the SEC and the Department of Justice (DOJ) of the U.S. between 2009 and 2013. The author reported that the stock return average of trading on inside information gains 34.9% over 21 trading days from the original leakage date until the official public announcement of regulatory announcements whereas merger and acquisition (M&A) events yield average returns of 43% over 31 trading days leading up to the event date. These findings provide empirical evidence of the impact of insider trading on the process of security price formation. Contrary to the massive amount of literature investigating insider trading in the U.S. and other developed capital markets, Tadawul has received very little scholarly attention. Numerous studies on Tadawul focus on the theoretical aspects of insider trading regulation, but there is little of empirical research. For instance, Syed and Bajwa (2018) conducted an event study approach to test the EMH in the Tadawul by examining the stock prices reactions to 1,601 quarterly earnings announcements from 2009 to 2014. The authors designated event window comprising 21 trading day and observed significant and positive ARs in favourable of good news trend during the days leading up to the event day, particularly from day 9 to day 4 within the event window. Same event window length of 21 trading days was used by Al Qudah and Badawi (2015) who tested the signaling theory to dividend announcements in Tadawul. Their findings suggest that the prices reactions to dividend announcements were not significant due to many restrictions on dividend policy in Tadawul. However, these findings are inconstant with those of Felimban et al. (2018) who investigated the response of the stock market to 1,092 dividend announcements made by 299 listed firms in the GCC region from 2010 to 2015 and provided evidence indicating that the response of stock prices lends partial corroboration to the signaling hypothesis. The present study is carried out in various ways going beyond the scope of those studies. It provides more precise predictions about insider trading activities and their implications for stock price movements. This paper employs different statistical analyses and uses larger and distinguished sample of unscheduled firms announcements over a longer period which witnessed radical transformations in Tadawul. Scholars and securities regulatory authorities attribute that the existence of significant ARs before the major firms events dates as an indicator that the events include important news about shares value and can be a signal of insider trading practices and information leakage (Jaffe, 1974; Olmo et al., 2011; Goldman et al., 2014; Collin-Dufresne & Fos, 2015). The ARs can be estimated by conducting the event study method which probe the existence of ARs in the stock prices prior to the firms event date. The level of potential insider trading can be estimated by using the MCM which identifies the ratio of APPMs that have taken place ahead of SAs. Conceptually, the idea of the MCM is underpinned by the EMH which assumes that new information should be rapidly reflected into price changes. Interpreting the occurrence of APPMs within the context of the EMH, the implicit inference is that it violates the strong form of the EMH which supposes that asset prices reflect all public and private information. Fama (1970) said, ‘strong form tests concerned with whether given investors or groups have monopolistic access to any information relevant for price formation’(p. 383). Figure 1 illustrates how insider trading activities influence the price movements. In a clean market, as shown by the green line, the asset price movement follows normal behaviour in the absence of new information over the estimation window leading up to the official announcement date. Once the announcement is made publicly, as indicated by the vertical line labelled as the event day, the stock price reacts instantly showing a clear spike on the event day as a result of the arrival of good news. By contrast, in an unclean market, the graph depicts that the stock price begins an upward drift, as shown by the rising red line, several days ahead of the event day during the pre-event window. In such case where the asset prices enjoyed a significant increase before the event day (i.e. APPMs), this behaviour may signal information leakage and could be a sign of insider trading activities before SAs. 4 A. ALQURAYN ET AL. The indication of the MCM can be estimated from the ratio of APPMs that were observed before the SAs. Subsection 4.2 describes the techniques for determining if an event is SA and preceded by APPMs. Briefly, the significant CARs over the post-event window imply that the announcement contains important news and should be considered as SA while the significant CARs across the pre-event window are indicator of the occurrence of APPMs. By contrast, the event is not considered as a SA or preceded by an APPM if no statistically significant CARs were detected over the event window being examined. The literature review establishes our research hypotheses which are formulated in a null form. This first hypothesis, denoted as H0,1, assumes that the announcement has no significant impact on the distribution of CARs over the post-event window. A necessary condition to assess if APPMs have not taken place before the SAs, is the absence of significant CARs across the pre-event window as proposed in our second hypothesis, denoted as H0,2, which supposes that the announcement has no significant impact on the distribution of CARs over the pre-event window. 2.2. The role of insider trading laws Previous academic studies have shown the significance of enforcing insider trading laws and found the legislation effects would be expected when enforcement mechanisms are enforced strictly but not merely the establishment of the laws (Bhattacharya & Daouk, 2009; Kwabi et al., 2018; Cline et al., 2021). Bhattacharya and Daouk (2002) conducted a comprehensive survey of insider trading regulations over all countries that had stock markets at the end of 1998. The authors documented that enactment of insider trading laws alone are unlikely to be effective without strict enforcement. Chen et al. (2017) found evidence that the initial enforcement of insider trading laws is positively associated with improvement in capital allocation efficiency. Insider trading regulations have intrigued researchers who have tried to determine how insiders exploit insider trading legislation loopholes (Henning, 2015; Dalko & Wang, 2016). Alkhaldi (2016) examined several insider trading cases in Tadawul and noted that those cases reviewed by the Committees for Resolution of Securities Disputes (CRSD) did not receive consistent assessment process. Alkhaldi (2015) and Al-Habshan (2017) addressed some instances of market misconducts in Tadawul which involve manipulation, poor transparency and insider trading cases. The authors indicated that such misconducts are due to deficiencies in the regulatory framework and inactive reactions from regulatory regime. In line with latter view, Alomari (2020) scrutinised the lack of clarity presents in both legal terminology and judicial precedents pertaining to insider trading regulations in CML. The author criticized the legal definition of insider information with specific emphasis on the differentiation between ‘use’versus ‘possession’indicating that the central issue is concerned with ambiguity of whether the prohibition applies to engaging in trading based on material non-public information or engaging in trading while possessing such information. If the laws are properly introduced and effectively enforced, investors believe that their rights are being protected by law which in turn maintains investors’confidence (La Porta et al., 2002;2006). The recent empirical studies on Tadawul, discussed in previous section, have documented the presence of significant ARs before the disclosure dates of earnings announcements as per Syed and Bajwa (2018) and dividend decrease announcements (Felimban et al., 2018). The evidence of significant price Figure 1. Stock price movements with instance of insider trading. COGENT ECONOMICS & FINANCE 5 changes before the dividend decrease announcements as well as immediately following the board meeting support Felimban et al. (2018) to conclude that the GCC region markets exhibit inefficiency due to the leakage information ahead negative news announcement and the sluggish adjustment of share prices to positive news. In contrast, Alhassan et al. (2019) examined the information content and the market reaction of quarterly earnings announcements of all firms listed on Tadawul for the years 2007 to 2017 and reported that stock price reactions were well-behaved due to the continuous developments in regulatory performance. However, the media coverage of the rumours of insider trading practices, increased criminal prosecutions, and hefty penalties imposed by the CMA against insider traders has raised concerns about Tadawul’s integrity. These are critical problems that could discourage investors’participation and pose a threat to the success of the goals related to the development of the capital market. In their empirical investigation of the impact of governance mechanisms and ownership structure on foreign investors’ decision for all non-financial firms listed in Tadawul in 2019, Bajaher et al. (2022) indicated that the existing changes in governance and capital market regulations within Saudi Arabia may not be adequate in terms of inducing institutional foreign investment. Algaeed (2021) suggested that the performance of the Saudi capital market with regards to its contribution and promotion towards economic development remains suboptimal. It could be argued that the weak governance of capital markets can result less capital allocation efficiency and raises investors’concern about their investments safety. There is evidence showing that countries with stricter insider trading rules and strong enforcement have been successful in reducing insider trading activities (Bhattacharya & Daouk, 2002; Zhang & Zhang, 2018). The amended regulatory changes instituted with the financial reforms in 2016 were created to strengthen the MCR, combats market misconduct, prompts investors’confidence and further align the market condition with global standards. The effects of these amendments on potential insider trading practices are assessed here by estimating and comparing the Tadawul’s MCM before and after the introduction of new regulatory changes. The MCM has been used by the United Kingdom’s Financial Conduct Authority (FCA) to examine the impact of the Financial Services and Markets Act (FSMA) on the level of insider trading. The FCA performed three studies of MCM for the firms listed on the UK market and provided annual updates to the measure from 2000 to 2013 (Dubow & Monteiro, 2006; Monteiro et al., 2007; Goldman et al., 2014). Similarly, the Australian Securities and Investments Commission (ASIC, 2016) and (ASIC, 2019) applied the MCM to assess the cleanliness of the Australian equity markets after the transfer of market supervision. Therefore, to examine whether the new regulatory changes succeeded in reducing the level of potential insider trading in Tadawul, we utilise the MCM which estimates the proportion of the SAs that were preceded by APPMs. The statistical significance of the difference is assessed by performing a ztest against the null hypothesis of being no significant changes in the ratio of APPMs between both periods. This leads to a more precise prediction as stated in our third null hypothesis, denoted as H0,3, which assumes that the difference in MCM between two periods is not statistically significant. 3. Sample and data description This study uses secondary data of firms’public announcements and daily stock prices across all sectors in the Tadawul. The sample period spans from 2011 to 2020 and is divided into two periods. The first period covers the pre-financial reforms period which starts from April 26, 2011, to April 25, 2016. The second period encompasses the post-financial reforms period, from April 26, 2016, to April 25, 2020. The selection of this period coincides with the raft of transformations that the Tadawul has witnessed such as reducing barriers to foreign investments in 2015, 3 obligating traded companies to adopt the International Financial Reporting Standards (IFRS) in 2017, 4 the launch of financial reforms in 2016, and the inclusion of the Tadawul in the major global financial indices from 2018 to 2020. 5 The primary source of our study data is the Market Data Premium Reports Database (MDPRD), available on the official stock exchange website (Tadawul). The Tadawul designed the E-Reference Data System which has several databases. 6 One of the databases is the MDPRD which is a reliable source of information providing comprehensive historical financial data for the Saudi capital market. The data were collected by considering the selection criteria that involved restrictions imposed by data availability as outlined in the following subsection. 6 A. ALQURAYN ET AL. 3.1. Selection criteria The present study requires data on firms announcements and their related securities during the relevant period. The sample of announcements is restricted to include unscheduled firms announcements published by issuers during the relevant period. The justifications for restricting the selection to unscheduled announcements stem from their merit of being unlikely anticipated, but they are typically known by corporate insiders. Other types of firms announcements like dividends or earnings announcements were excluded because they are often prescheduled and usually subject to explicit insider trading embargo (Cohen et al., 2012). Importantly, when our analysis shows that APPMs occurred prior to scheduled events, one may argue that these APPMs are not driven by potential insider trading activities, but rather by the fact that the scheduled announcements are predictable. Furthermore, the process of price discovery preceding scheduled events may be attributed to the activities of sophisticated traders which are motivated by their acquisition of information and/or the information provided by sell-side analysts (Weller, 2018; Chen et al., 2020). However, APPMs that occurred before unscheduled announcements are more likely due to insider trading activities. The selection was limited to major unscheduled events that fell under the heading of ‘merger, acquisition, takeover, awarding contract’and two subsets of unscheduled, ‘good news’and ‘bad news’announcements. The data set of each firm announcement was manually documented to the millisecond. This timing was critical to our analysis because if the announcement occurred outside of trading hours, the date of the announcement could be misidentified. In these cases, the following trading day was designated as the event day. The daily stock prices were in the form of adjusted closing prices. Additionally, the following selection criteria was made to arrive at a clean sample: 1. All firms must have been listed on Tadawul and published unscheduled announcements during the relevant period. 2. Each announcement must include the firm’s stock price, announcement date, time, heading, and content. 3. Securities of the firms must have been actively traded during the estimation and event windows (253 trading days). 4. Stocks that made announcements during the relevant period, including those that were later delisted, and have enough data on daily prices for the estimation window and event window were included. The final sample collected during the relevant period consists of 1,958 unscheduled announcements. There were 761 announcements drawn from 124 companies across the pre-financial reforms period and 1,197 announcements from 178 companies over the post-financial reforms period. Table 1 provides a descriptive overview of the numbers and types of announcements within the relevant period. Table 1. Overview of the firms announcements sample during the relevant period. Relevant period Year No/year Type of announcements Acquisition Takeover Awarding contract Merger Good news Bad news Pre-financial reforms 2011 106 12 14 22 3 49 6 2012 145 13 8 40 6 71 7 2013 144 10 10 40 9 67 8 2014 177 19 15 41 7 82 13 2015 137 16 15 38 0 62 6 2016 52 4 5 6 0 35 2 Total 1st half 761 74 67 187 25 366 42 Post-financial reforms 2016 173 14 11 63 1 77 7 2017 262 14 8 76 24 128 12 2018 288 22 11 89 21 137 8 2019 351 29 16 86 28 176 16 2020 123 12 5 17 14 69 6 Total 2nd half 1197 91 51 331 88 587 49 Note. In this table we documented the number of events per year (No/year), the total number of the events analysed during the relevant period. The year starts 26th April and ends 25th April. COGENT ECONOMICS & FINANCE 7 event window CARs are used to make inferences of whether the abnormal pre-announcement price movements (APPMs) have taken place ahead of the SAs. Table 4 and Table 6 report the number of events that met our statistical threshold for being SAs and preceded by APPMs over the pre-financial reforms and the post-financial reforms periods, respectively. In other words, these empirical findings do not permit the rejection of H0,1and H0,2:On the other hand, Table 5 and Table 7 show the events for which the H0,1which assumes that the event had no impact on distribution of CARs over the post-event window was rejected; however, we found no evidence to support H0,2concerning with the existence of statistically significant APPMs. The data reported in Table 5 relate to the analysis outcomes over the pre-financial reforms periods, while the findings for the post-financial reforms period are shown in Table 7. 6. Conclusion The study estimated the level of potential insider training in Tadawul using the MCM to examine the extent to which APPMs were detected ahead of 1,958 unscheduled announcements made by firms listed in Tadawul from 2011 to 2020. The event study approach was conducted to assess the impact of an event on stock returns. We used the market model to estimate the stock ARs. We computed the CARs and employed the bootstrapping technique to make inferences on whether the CARs during the event Table 7. The CARs of the events that were found statistically significant to be classified as SAs, but they were not preceded by APPMs during the post-financial reforms period. No. of Events Actual post-event CARs (−2,þ2) Sig. at 1% Simulated post-event CARs Actual pre-event CARs (−2,−1) NS. at 10% Simulated pre-event CARs 0.5% quantile 99.5% quantile 90% quantile 10% quantile 1 13.07 8.37 −7.68 0.82 2.64 −2.85 2 19.52 9.40 −8.70 −0.05 3.65 −3.20 3−15.15 13.07 −9.44 −3.14 4.69 −3.21 4 10.89 8.03 −6.71 −0.98 3.30 −2.68 5−11.97 13.70 −9.64 1.27 5.07 −4.06 6 19.78 8.93 −8.34 0.40 3.55 −3.17 7 8.67 5.87 −5.19 −0.19 2.47 −2.28 8−7.10 6.90 −6.70 0.72 3.04 −3.01 9 7.22 6.09 −5.04 0.88 2.19 −1.94 10 7.45 6.04 −5.78 −0.47 2.41 −2.12 11 −14.16 13.01 −11.09 0.41 4.13 −3.36 12 −13.38 16.48 −12.61 −0.69 6.95 −5.24 13 −13.41 14.68 −12.49 −4.57 5.91 −5.15 14 20.22 12.82 −9.62 1.59 4.77 −3.97 15 22.44 6.17 −7.23 1.93 2.74 −2.76 16 10.88 10.04 −7.31 −0.67 3.99 −3.20 17 13.94 13.16 −9.08 0.03 5.58 −3.64 18 12.93 11.96 −9.11 1.50 4.45 −3.17 19 13.37 7.33 −8.43 0.98 3.29 −2.99 20 5.50 5.24 −4.89 1.64 2.22 −2.17 21 22.05 10.43 −11.52 1.53 4.12 −4.70 22 −10.22 8.18 −7.34 −1.46 3.48 −3.28 23 −15.68 11.20 −8.31 −1.94 4.05 −3.63 24 −10.15 11.26 −8.00 −1.61 4.22 −3.06 25 19.63 8.31 −8.17 1.16 3.34 −3.73 26 −6.18 4.69 −5.63 0.46 2.13 −2.27 27 −7.49 3.60 −4.13 −0.83 1.64 −1.52 28 4.11 3.95 −4.10 0.90 1.55 −1.57 29 −10.10 10.75 −8.19 1.70 4.04 −3.62 30 7.78 7.08 −6.53 0.91 2.86 −2.77 31 −9.36 12.65 −7.74 −3.11 5.15 −3.35 32 −13.52 7.14 −6.09 −1.32 1.70 −2.90 33 20.60 13.51 −11.91 3.88 5.42 −4.28 34 −11.20 10.35 −6.34 −0.43 3.65 −2.74 35 −16.06 12.17 −8.71 −1.35 5.14 −3.89 36 −21.17 13.42 −9.75 −2.27 5.17 −3.97 37 7.93 7.40 −8.83 1.90 2.98 −2.65 38 −8.18 8.90 −3.30 −3.23 3.81 −3.43 39 −13.41 11.22 −9.93 −1.44 3.30 −3.19 40 23.76 10.13 −7.07 3.03 4.31 −3.12 Note. The note shown in the Table 5 applies to the analysis results reported in this table. 14 A. ALQURAYN ET AL. window being examined were statistically significant. We calculated the MCM as the ratio of firms events for which APPMs in daily stock prices were observed prior to the release of SAs. The findings suggest that the proportion of APPMs detected ahead of SAs was lower after the introduction of financial reforms. The Tadawul’s MCM shows that 56.36% of SAs were preceded by APPMs across the pre-financial reforms period compared to 45.2% after financial reforms were passed. The analysis represents that despite there is a general improvement, as evidenced by 11.16% decline in the ratio of APPMs, the statistics for the subsequent period were not statistically lower than the preceding period. A possible explanation for this could be that the new regulatory changes introduced with financial reforms have not yet had a statistically significant effect in reducing the level of potential insider trading activities. This study provides empirical findings with important implications for policymakers, firms, and investors. The findings could be beneficial in notifying the regulators’enforcement mechanism to strengthen the market surveillance and combat market misconduct by implementing disciplinary actions more actively. The results alert firms to abide by CML rules and adhere the disclosures and transparency policies. Investors can benefit from the study as it supplies useful information about the market conditions regarding insider trading practices. The scope of our study is limited to perform an event study to stock returns; however, conducting an event study to trading volumes would reinforce the return analysis. Another limitation of our analysis is the use of the OLS market model. Therefore, another direction for future research is to use several models and examine their differences. Moreover, it may be interesting to compare the reactions of scheduled announcements versus unscheduled announcements. Notes 1. In the 2018 Annual Report published by the CMA, Table 51 on page 158 shows the total amounts of financial penalties imposed by the CMA and the CRSD in 2018 against violators of the laws and regulations. Penalties for insider trading were the highest and were set at more 325,222,919 SR (Saudi Riyal). The report is available at https://cma.org.sa/en/Market/Reports/Documents/cma_2018_report.pdf. 2. The CMA’s announcement is available at https://cma.org.sa/en/Market/News/pages/CMA_N_2942.aspx. 3. The relevant information is available at https://cma.org.sa/en/Market/QFI/Pages/default.aspx. 4. https://www.cma.org.sa/en/market/news/pages/cma_n_2107.aspx. 5. The inclusion to FTSE Russell is available at https://cma.org.sa/en/MediaCenter/PR/Pages/FTSERussell.aspx, and the inclusion to MSCI emerging market is availavle at https://www.msci.com/msci-saudi-arabia-indexes. 6. https://www.saudiexchange.sa/wps/portal/tadawul/knowledge-center/about/ereference-data?locale=en. Disclosure statement No potential conflict of interest was reported by the author(s). About the authors Abdulrhman Alqurayn is a lecturer at King Khalid University and a PhD candidate at Victoria University, Melbourne, Australia. He had his first degree in Business and Administration in 2011. Later on, he obtained his master’sin finance in 2016. He has worked at King Khalid University as a lecturer and a chairman of Business and Administration Department. Nada Kulendran is an Honorary Fellow at Victoria University, Melbourne, Australia. His area of expertise includes econometric modelling, financial markets forecasting, and volatility forecasting. 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