PERFORMANCE OF STOCKS RECOMMENDED ON THE BASIS OF INSIDER TRADING ACTIVITY

The purpose of this paper is to assess whether abnormal returns could have been earned by an investor who concentrated solely on the stocks listed in the Consensus of Information (COI) monthly newsletters. Using residual-based techniques, the authors find that (1) stocks listed in the COI newsletters were characterized by excess positive returns over the four months immediately preceding listing and that (2) users of the COI's recommendations could have earned moderate excess returns by systematically acquiring shares of these companies and holding them over a twelve-month period starting in the month the newsletter is published or one month hence. Given that the recommendations yielding the largest abnormal returns to noninsiders were based on a mixture of open market purchases and exercised stock options, definitive conclusions with respect to the predictive implications of exercised stock options cannot be drawn.