Abstract

This paper investigates whether credit rating agencies and lenders perceive that insider trading provides information about the future prospects of firms and reflect insider trading on the credit rating and interest rates. If they perceive insider sell(insider buy) as high(low) default risk in the future and they reflect the risk on their credit rating and interest rates, insider sell(insider buy) is negatively(positively) associated with credit rating and positively(negatively) associated with cost of debt. This study uses 2,272 firm－year observations listed on two exchanges(KOSPI and KOSDAQ) from 2008 to 2012. The major findings are as follows. First, insider sell is significantly negatively associated with credit rating and positively associated with cost of debt. Second, there is no significant relationship between insider buy and credit rating(cost of debt). These findings suggest that insider buy is not perceived as default risk. However, insider sell is perceived as high default risk. This implies that credit rating agencies and lenders are likely to be more impacted by bad news than good news. In additional tests, the relation between insider sell and credit rating(cost of debt) is stronger in KOSDAQ firms than in KOSPI firms. Overall, this paper shows that credit rating agencies and lenders reflect insider trading on their decisions. This paper contributes in following aspects. First, this paper provides new evidence that insider sell causes a higher cost of debt, and thus extent the current literature on the important role insider trading plays in the information efficiency of financial markets. Second, this paper suggests that insider trading, especially insider sell, is a significant determinant of credit rating and cost of debt.

Keywords

• Insider trading
• insider sell
• insider buy
• credit rating
• cost of debt(interest rate)

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