Insider Selling on Public Information: Evidence from Competition with Short Sellers

Abstract

This paper studies patterns of insider trading in the presence of foreknowledge of long-term material information and short-term mispricing. Using a sample of U.S. stocks in the period after increased regulatory restriction we document that both insiders' purchases and sales predict future returns. Conditioning on the short-selling activity after earnings announcements as a proxy for demand of arbitrageurs who trade to exploit short-term mispricing, we show that insiders profit from selling because of their ability to exploit mispricing after public news releases. Insiders' purchases, in contrast, do exploit insiders' foreknowledge of long-term material information. Most of the informed insider trading comes from opportunistic insider transactions. Our paper contributes to the discussion about (in)effectiveness of regulatory restrictions concerning insider trading.