Abstract
AbstractUsing a well‐established methodology to measure aggregate insider trading, this exploratory study examines the relation between aggregate insider trading and future stock market returns. Analysing a unique data set of more than 1.3 million individual insider transactions in 16,893 US, European, and Asian firms between 2003 and 2017, we provide novel results for a multitude of countries. We find that the null‐hypothesis (i.e., aggregate insider trading is not related to future stock market returns and thus corporate insiders cannot forecast economy‐wide trends) cannot be unanimously rejected for all 32 countries in the sample. Aggregate insider trading in the United States, Asia, China, Hong Kong, and India is coherently positively associated with future market returns according to two aggregate insider sentiment indicators. For Switzerland, Sweden, Poland, Malaysia, Singapore, and the Philippines we further find limited evidence indicating a positive association between aggregate insider trading and future index returns. On the contrary, there is some evidence that in Germany, Austria, Ireland, and Denmark aggregate insider trading is negatively associated with future market returns. Implications and further research opportunities are discussed.
Highlights
It is well established that corporate insiders profitably trade shares in their own firms on US (Finnerty, 1976b; Jaffe, 1974; Lakonishok & Lee, 2001; Seyhun, 1986), European (Aussenegg, Jelic, & Ranzi, 2016; Fidrmuc,[Correction added on 5 October 2020, after first online publication: The superfluous text that appeared at the beginning of Introduction in the original version of the article has been removed.]Goergen, & Renneboog, 2006), and Asian (Bris, 2005; Jaggi & Tsui, 2007) markets
If insiders do not collectively base their trades on expectations of market-wide developments, aggregate insider trading will not be statistically significantly associated with future stock market returns, and insiders are more likely to trade for private firm-specific cash flow news
Analysing US insider trades from 1975 to 1981, the results suggested that aggregate insider trading conveys information pertaining to future changes in economy-wide trends not already factored into current stock prices
Summary
It is well established that corporate insiders profitably trade shares in their own firms on US (Finnerty, 1976b; Jaffe, 1974; Lakonishok & Lee, 2001; Seyhun, 1986), European (Aussenegg, Jelic, & Ranzi, 2016; Fidrmuc,[Correction added on 5 October 2020, after first online publication: The superfluous text that appeared at the beginning of Introduction in the original version of the article has been removed.]Goergen, & Renneboog, 2006), and Asian (Bris, 2005; Jaggi & Tsui, 2007) markets. What remains is the conundrum as to whether insiders trade on firm-specific or economy-wide superior information If insiders base their trades predominantly on macroeconomic private intelligence, it is likely that a majority of insiders possess similar information and collectively trade in a particular direction. If this is the case, aggregate insider transactions should be able to forecast future market returns. If insiders do not collectively base their trades on expectations of market-wide developments, aggregate insider trading will not be statistically significantly associated with future stock market returns, and insiders are more likely to trade for private firm-specific cash flow news
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