Information Asymmetry and Insider Trading: Evidence from Exogenous Changes in Analyst Coverage

Abstract

I investigate the impact of information asymmetry on insider trading by exploiting a quasi-experimental design: the brokerage closure-related terminations of analyst coverage, which exogenously increase the information asymmetry of the affected firms. Using a difference-in-differences approach, I find that after the terminations of analyst coverage, corporate insiders obtain significantly higher abnormal returns and enjoy larger abnormal profits. The magnitudes of the increase are large economically. For firms with five or fewer analysts, losing one analyst increases insiders’ six-month abnormal returns by 16.0% for purchases, and by 10.7% for sales (both in absolute terms). My paper highlights the role of information asymmetry as a critical determinant of insiders’ abnormal profits, and calls for regulatory attention to corporate insiders’ transactions associated with high levels of information asymmetry.