The Characteristics of a Firm's Information Environment and the Predictive Ability of Insider Trades

Abstract

This study examines the relation between the ability of insider trades to predict future returns and the availability of firm information. It investigates the marginal effect of three information sources: financial statements, analyst following, and firm information provided by voluntary disclosures or general news coverage. Timely disclosure of value relevant information reduces insiders' ability to trade profitably on private information. Investors acquire timely information from a variety of sources, and information provided by one source can affect the production of information by other sources. Thus, we examine these major sources simultaneously to understand the marginal effects of each. We find that the ability of insider trades to predict future returns diminishes in situations of increased analyst following and financial statement informativeness. However, we are unable to find a significant relation between the availability of company news and the predictive ability of insider trades.