Perks or Peanuts? The Dollar Profits to Insider Trading

Abstract

While prior research has documented large percentage returns to insider trading, it is less clear whether insiders make large dollar profits on their trades. This is the first paper to present large-sample, comprehensive evidence on the dollar profits from legal insider trading. We show that dollar profits are economically insignificant for a typical insider, the median insider in our sample earning annual abnormal profits of $464 per year. Further, we show that insiders with high abnormal returns on their trades do not make large dollar profits. We then gauge how much outside shareholders lose to insiders, estimating that a median amount of $3,000 is redistributed each firm-year from outsiders to corporate insiders. Finally, we use variation in SEC budgets over time and the implementation of SOX to assess whether governance can reduce insider trading profits. Here, we show that while returns decrease, dollar profits may actually increase with higher enforcement intensity or stricter reporting requirements. Overall, while trades of corporate insiders may predict future returns as prior research has shown, our results indicate that the typical insider benefits little from this information in dollar terms.