Don't Cover Me: Analyst Innate Ability and Insider Trading

Abstract

This paper employs a novel measure of sell-side financial analyst innate ability or natural talent and explores its effects on insider trading. When a firm is covered by high-ability analysts, we find significantly less insider trading prior to positive earnings news, but not prior to negative earnings news. The results mostly reside in opportunistic trades by insiders rather than routine trades. When a firm is initially covered by an analyst, we find decreased subsequent insider trading prior to earnings news and the change in subsequent insider trading is also strongly associated with analyst innate ability. We also document an association between analyst ability and insider trading profitability. Overall, our results suggest that (1) high-ability analysts contribute more than lowability analysts to a firm’s information environment and reduce both the intensity and the profitability of insider trading; and (2) high-ability analysts may help impound firm-specific information possessed by corporate insiders. Unscrupulous insiders attempting to expropriate profits from their trades may prefer to not be covered by high-ability analysts.