Abstract
AbstractUsing a sample of countries that require timely disclosures of insider trades, I investigate the effect of country‐level institutions that promote transparency on the extent to which aggregate insider trades predict market returns. I find that financial information transparency mitigates the predictive content of aggregate insider trades when markets are more likely to deviate from fundamentals (i.e., during market fads), and when there is greater co‐movement in stock prices. In contrast, there is some evidence that governance and investor protection mitigate the association between aggregate insider trades and future earnings surprises. Hence, holding constant the timely disclosures of insider trades, other capital market institutions play complementary roles in mitigating the informational frictions that give rise to the predictive content of aggregate insider trades.
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