Abstract
This paper examines whether insider trades reflect the insiders' superior knowledge of future cash flow realizations, as proxied by the firm's future return and earnings performance. We find strong evidence that insider trades are positively associated with the firm's future earnings performance. This relation is shown to be incremental to the book-to-market and past return relations documented in Rozeff and Zaman (1998), suggesting that insiders trade on both transitory security misvaluation and private information about future cash-flow payoffs. We find that insider trading behavior within each book-to-market portfolio varies with the horizon of the subsequent earnings news. Insider purchases are significantly positively related to next year's earnings news across all book-to-market portfolios, while the sign of the relation between insider purchases and contemporaneous earnings is negative (positive) for glamour (value) firms. Finally, we show that the relation between insider trades and future earnings performance is amplified (attenuated) as the likely ex ante benefits (costs) to trading on financial performance information increase.
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