The Persistence of Opportunistic Insider Trading

We study the drivers of persistent insider trading profitability by examining the trades of insiders whose past trades have been profitable. We find that the current transactions of these persistently profitable (PP) insiders better predict firm performance than those of other insiders. The relative abnormal performance is more pronounced for trades of insiders who are managers rather than large shareholders or unaffiliated insiders and for trades in firms with weaker governance and greater information asymmetry. The trades of PP insiders also better predict earnings surprises, major corporate news, and analyst revisions. Collectively, these results indicate that PP insider transactions provide valid signals regarding future firm performance and that persistence in profitability is driven by informational advantages.     

Insider trading and shareholder investment horizons

This paper examines the effects of shareholder investment horizons on insider trading. We find that insiders are less likely to trade on private information and the profitability of insider trades is lower when shareholder investment horizons are longer. We further examine two channels through which shareholders with longer investment horizons can impede insider trading: direct monitoring and better information environment. Consistent with the direct monitoring channel, we show that insiders in firms with longer shareholder investment horizons are more likely to shift trades from the month right before earnings announcements to the month right after earnings announcements. Moreover, the impact of investment horizons are stronger in firms with higher ex ante litigation risk, with lower corporate governance quality, and that are not targets of hedge fund activists. Consistent with the information environment channel, we show that longer shareholder investment horizons increase the frequencies of information disclosure and insiders in firms with longer shareholder investment horizons are more likely to trade in an isolated manner rather than in sequences.     

Insider trading and managerial incentives

We derive conditions under which permitting manager “insiders” to trade on personal account increases the equilibrium level of output and the welfare of shareholders. These increases are produced by two effects of insider trading. First, insider trading impounds information about hidden managerial actions into asset prices. This impounding of information allows shareholders to make better personal portfolio-allocation decisions. Second, allowing insider trading can induce managers to increase, on average, the correlation between their personal wealth and firm value beyond the level dictated by the employment relationship alone. This increased correlation increases managerial incentives. When these two effects are only weakly present, permitting insider trading harms shareholders, because insider trading reduces shareholder control over the performance–compensation relationship. In addition, when managerial effort incentives are high and corporate governance costs are low, managers may prefer insider-trading restrictions because such restrictions force shareholders to offer them a larger fraction of output through the employment relationship.     

Does stronger corporate governance constrain insider trading? Asymmetric evidence from Australia

We investigate the role of internal corporate governance in limiting opportunities for ASX company ‘insiders’ to extract abnormal returns from trading ‘own shares’. We show that stronger governance translates into more restrictive insider trading policies and, while not resulting in lower insider purchase volumes, values or profits, it does reduce insider selling profitability. Firm size and increasing trading policy restrictiveness is associated with reduced insider purchase profitability while insider sale profitability is reduced by aggregate governance, trading restrictions and increasing trading policy restrictiveness. We conclude that internal firm governance constrains insider sales but not purchases, providing contrarian trading signals.     

The Governance Effect of the Media's News Dissemination Role: Evidence from Insider Trading

We investigate whether the media plays a role in corporate governance by disseminating news. Using a comprehensive data set of corporate and insider news coverage for the 2001–2012 period, we show that the media reduces insiders’ future trading profits by disseminating news on prior insiders’ trades available from regulatory filings. We find support for three economic mechanisms underlying the disciplining effect of news dissemination: the reduction of information asymmetry, concerns regarding litigation risk, and the impact on insiders’ personal wealth and reputation. Our findings provide new insights into the real effect of news dissemination.     

“Swimming Ducks Forecast the Coming of Spring”—The predictability of aggregate insider trading on future market returns in the Chinese market

This study systematically examines the ability of aggregate insider trading to predict future market returns in the Chinese A-share market. After controlling for the contrarian investment strategy, aggregate executive(large shareholder)trading conducted over the past six months can predict 66%(72.7%) of market returns twelve months in advance. Aggregate insider trading predicts future market returns very accurately and is stronger for insiders who have a greater information advantage(e.g., executives and controlling shareholders).Corporate governance also affects the predictability of insider trading. The predictability of executive trading is weakest in central state-owned companies,probably because the "quasi-official" status of the executives in those companies effectively curbs their incentives to benefit from insider trading.The predictive power of large shareholder trading in private-owned companies is higher than that in state-owned companies, probably due to their stronger profit motivation and higher involvement in business operations. This study complements the literature by examining an emerging market and investigating how the institutional context and corporate governance affect insider trading.     

Insider trading patterns

We revisit the information content of stock trading by corporate insiders with an expectation that opportunistic insiders will spread their trades over longer periods of time when they have a longer-lived informational advantage, and trade in a short window of time when their advantage is fleeting. Controlling for the duration of insiders' trading strategies, we find robust new evidence that both insiders' sales and purchases predict abnormal stock returns. In addition, we provide evidence that insiders attempt to preserve their informational advantages and increase their trading profits by disclosing their trades after the market has closed. When insiders report their trades after business hours, they are more likely to engage in longer series of trades, they trade more shares overall, and their trades are associated with larger abnormal returns. Finally, we show how accounting for these trading patterns sharpens screens for corporate insiders who trade on infor- mation.     

Insider Trading in the OTC Market

In this paper, we examine the profitability of insider trading in firms whose securities trade in the OTC/NASDAQ market. Although the evidence suggests timing and forecasting ability on the part of insiders, high transaction costs (especially bid-ask spreads) appear to eliminate the potential for positive abnormal returns from active trading. By implication, outside investors who mimic the trading of insiders are also precluded from earning abnormal profits. In addition, we provide evidence on the determinants of insiders' profits. The data suggest that insiders closer to the firm trade on more valuable information than insiders removed from the firm.     

Does common ownership constrain managerial rent extraction? Evidence from insider trading profitability

This study identifies a new economic benefit of common institutional ownership, which refers to the increasingly contentious phenomenon of U.S. firms sharing stockholders with their industry competitors. We find a significantly negative relation between common ownership and insider trading profitability. The disciplinary effect of common ownership on opportunistic insider trading is particularly evident when the information effects of common ownership are greater, when common owners are more likely to benefit from positive governance externalities, and in the subset of trades made by opportunistic insiders. Using the exogenous variations in common ownership induced by financial institution mergers, we conduct a difference-in-differences analysis and find consistent results. We also provide evidence that common owners encourage firms to impose ex-ante restrictions on insider trading and take ex-post actions to discipline opportunistic insiders by voting against management. Overall, our findings suggest that common institutional shareholders have information advantages, governance incentives, and effective means to constrain opportunistic insider trading.     

Tax noncompliance and insider trading

This paper explores whether insiders who have shown noncompliance with the tax law (‘noncompliant insiders’) are more prone to exploit their information advantage in insider trading, compared to other insiders (‘compliant insiders’). Our empirical results from analyzing archival data of all insider trades in Sweden show that noncompliant insiders use more of their information advantage to trade their insider stocks shortly before significant stock price changes, compared to compliant insiders. These results remain similar after controlling for various insider- and firm-specific determinants of insider returns, including firm and year fixed effects. We believe that our results are of interest for academics and regulatory authorities monitoring and screening insider trading activity.     

Sooner or Later: An Analysis of the Delays in Insider Trading Reporting

Abstract:  Until October 2004, corporate insiders in Germany were required to report trades in the shares of their firm 'without delay'. Yet in practice, substantial reporting delays were common. We show that the delays are related systematically to the characteristics of the firm. Delays are longer in firms with dispersed ownership and in firms using German accounting standards. This suggests that managers of these firms are less responsive to the informational requirements of the capital market. We further find that abnormal returns after the reporting date of an insider trade are independent of the reporting delay. This implies that prices are distorted in the period between the insider trading and the reporting date. This is a strong point in favour of regulations that require and enforce the immediate disclosure of insider trades.     

Information Content of Insider Trading Around Corporate Announcements: The Case of Capital Expenditures

There is gathering evidence of insider trading around corporate announcements of dividends, capital expenditures, equity issues and repurchases, and other capital structure changes. Although signaling models have been used to explain the price reaction of these announcements, a usual assumption made in these models is that insiders cannot trade to gain from such announcements. An innovative feature of this paper is to model trading by corporate insiders (subject to disclosure regulation) as one of the signals. Detailed testable predictions are described for the interaction of corporate announcements and concurrent insider trading. In particular, such interaction is shown to depend crucially on whether the firm is a growth firm, a mature firm, or a declining firm. Empirical proxies for firm technology are developed based on measures of growth and Tobin's q ratio. In the underlying “efficient” signaling equilibrium, investment announcements and net insider trading convey private information of insiders to the market at least cost. The paper also addresses issues of deriving intertemporal announcement effects from the equilibrium (cross-sectional) pricing functional. Other announcement effects relate the intensity of the market response to insider trading, variance of firm cash flows, risk aversion of the insiders, and characteristics of firm technology (growth, mature, or declining).     

Effect of ownership,governance, and transparency on liquidity – Chilean evidence

Companies with relatively thin trading, a high concentration of insider ownership, and a privatized pension system characterize Chile’s Santiago Stock Exchange. Within this setting, we study the relationship between ownership concentration, corporate governance, and stock market liquidity. Our results suggest that board independence, corporate disclosure and outside monitoring by institutions help moderate the effects that insiders have on trading costs and liquidity. We also find that market makers with inventory reduce the informational component of trading costs. Finally, the trades of insiders provide price guidance to market makers, while traders employ a follow-the-insider strategy when transparency is low.     

Insider-trading,discretionary accruals and information asymmetry

Using US data for the period from 2004 to 2012 and alternative discretionary accruals measures, we examine whether insiders manipulate earnings in an asymmetric information environment to profit from their informed trades, and whether the intervening information environment influences the relationship between earnings management and insider trading. We show that insider trading dominated by sell trades has a positive association with discretionary accruals. The incremental effect of information asymmetry as well as the interaction with insider trading is also prevalent in this relation, confirming the moderating effect of asymmetric information. Further, we show that the active involvement of some key insiders in high discretionary accruals is for personal benefit more in growth firms than in value firms. Our results also suggest that earnings management allows for insiders’ opportunistic, rather than routine, buy and sell trades. Our findings highlight that regulators should oversee and scrutinise both insider trading and earnings management to mitigate the risk of the opportunistic behaviour of insiders to avoid future corporate scandals.     

The Reaction of Investors and Stock Prices to Insider Trading

Trading by corporate insiders and their tippees is analyzed in Anheuser-Busch's 1982 tender offer for Campbell Taggart. Court records that identify insider transactions are used to disentangle the individual insider trades from liquidity trades. Consistent with previous studies, insider trading was found to have had a significant impact on the price' of Campbell Taggart. However, the impact of informed trading on the market is complicated. Trading volume net of insider purchases rose. Contrary to the broad implications of adverse selection models, Campbell Taggart's liquidity improved when the insiders were active in the market, and the insiders received superior execution for their orders.     

Insider Trading and Corporate Governance: The Case of Germany

We analyse transactions by corporate insiders in Germany. We find that insider trades are associated with significant abnormal returns. Insider trades that occur prior to an earnings announcement have a larger impact on prices. This result provides a rationale for the UK regulation that prohibits insiders from trading prior to earnings announcements. Both the ownership structure and the accounting standards used by the firm affect the magnitude of the price reaction. The position of the insider within the firm has no effect, which is inconsistent with the informational hierarchy hypothesis.     

Legal Risk and Insider Trading

Do illegal insiders internalize legal risk? We address this question with hand-collected data from 530 SEC (the U.S. Securities and Exchange Commission) investigations. Using two plausibly exogenous shocks to expected penalties, we show that insiders trade less aggressively and earlier and concentrate on tips of greater value when facing a higher risk. The results match the predictions of a model where an insider internalizes the impact of trades on prices and the likelihood of prosecution and anticipates penalties in proportion to trade profits. Our findings lend support to the effectiveness of U.S. regulations' deterrence and the long-standing hypothesis that insider trading enforcement can hamper price informativeness.     

Insider trading,future earnings,and post-earnings announcement drift

This paper examines the association between insider trading prior to quarterly earnings announcements and the magnitude of the post-earnings announcement drift (PEAD). We conjecture and find that insider trades reflect insiders’ private information about the persistence of earnings news. Thus, insider trades can help investors better understand and incorporate the time-series properties of quarterly earnings into stock prices in a timely and unbiased manner, thereby mitigating PEAD. As predicted, PEAD is significantly lower when earnings announcements are preceded by insider trading. The reduction in PEAD is driven by contradictory insider trades (i.e., net buys before large negative earnings news or net sells before large positive earnings news) and is more pronounced in the presence of more sophisticated market participants. Consistent with investors extracting and trading on insiders’ private information, pre-announcement insider trading is associated with smaller market reactions to future earnings news in each of the four subsequent quarters. Overall, our findings indicate insider trading contributes to stock price efficiency by conveying insiders’ private information about future earnings and especially the persistence of earnings news.     

Strategic insider trading in foreign exchange markets

Inside traders are well-documented to leverage private idiosyncratic information for personal gain in centralized exchanges such as stock markets. Evidence is rare, however, for decentralized and fragmented over-the-counter markets with microstructure properties that make them particularly vulnerable to stealth trading. The 2015 criminal conviction of Hill and Kamay for foreign exchange insider trading is the first in over-the-counter markets. We analyze their actions to show the complex, strategic decision-making of insiders even in opaque markets where they run a low risk of detection and prosecution: they trade when the market is most sensitive to local information, carefully choose and time their trades to minimize the risk of confounding information disclosures that may affect their profits, as well as act during high noise trading to mask their trades. Our results are consistent with evidence on insider trading in stock markets. We highlight the limitations of regulatory control in over-the-counter markets where technology-based surveillance methods are ineffective, while reinforcing the importance of whistleblowers in detecting and preventing insider trading.     

Insider Trading in the Hong Kong Stock Market

Many previous studies on insider trading are based ondata in the U.S. capital market and conclude thatinsiders can earn abnormal profits. This paperexamines abnormal price performance associated withinsider trading in the Hong Kong stock market. We findthat abnormal profits associated with insider tradingare all concentrated on small firms. Trading volumedoes matter in determining the magnitude of thoseabnormal profits. Our results show that insiders ofmedium-sized and large firms do not earn abnormalprofits. Finally, it is found that outsiders who mimicthe information of insider trades associated withmedium-sized and large firms cannot earn abnormalprofits.