Aggregate Insider Trading Research Articles

Government Ownership and the Public Information Content of Insider Trading: International Evidence

This paper investigates the political determinants of informed insider trading using an international sample of firms from 28 countries. We show that insider trading in state-owned firms (SOEs) is statistically and economically more profitable and informative than in non-state-owned firms, indicating a unique political information advantage enjoyed by these insiders. Further analysis shows that insider trading in government-owned firms becomes more profitable during nationwide periods of political uncertainty and when industry-specific government actions are introduced. Moreover, the aggregate insider trading in SOEs better predicts future stock market returns than that in non-SOEs. These results suggest that the political information advantage of SOE insiders is evident in both the idiosyncratic and macroeconomic information content of insider trading, consistent with the superior ability of these insiders to interpret the economic impact of the country-, industry-, and firm-specific government actions.

Aggregate insider trading and stock market volatility in the UK

This paper examines the relationship between aggregate insider trading (AIT) and stock market volatility using monthly data on insider transactions by UK executives in public limited companies for the period January 2002 - December 2020. More specifically, a Vector Autoregression (VAR) model is estimated, and impulse response analysis is carried out. The main finding is that higher AIT (more specifically, insider purchases) leads to a short-run increase in stock market volatility; this can be attributed to a combination of insiders manipulating the timing and content of the information they release and the revelation of new economy-wide information to the market. The UK being a well-regulated market, it is plausible that the main driver of the increase in stock market volatility should be the information effect. These results are shown to be robust to using alternative (direct) measures of AIT.

Aggregate insider trading in the S&P 500 and the predictability of international equity premia

We show that aggregate insider trading (AIT) in the S&P 500 is a reliable predictor of the U.S. equity premium, while AIT outside the S&P 500 seems to be uninformative. In an international setting, we find that AIT based on S&P 500 insiders predicts international equity premia. Contrary to our U.S. based measure of AIT, we do not find any predictive content of domestic AIT for international equity premia. The informational content of AIT of S&P 500 insiders for U.S. and international equity premia stems from the insiders’ ability to forecast cash flow news in- and outside the U.S.

Aggregate Insider Trading in the S&P 500 and the Predictability of International Equity Premia

Aggregate Insider Trading in the S&P 500 and the Predictability of International Equity Premia

Aggregate Insider Trading and Stock Market Volatility in the UK

Aggregate Insider Trading and Stock Market Volatility in the UK

Aggregate insider trading and future market returns in theUnited States, Europe, and Asia

AbstractUsing a well‐established methodology to measure aggregate insider trading, this exploratory study examines the relation between aggregate insider trading and future stock market returns. Analysing a unique data set of more than 1.3 million individual insider transactions in 16,893 US, European, and Asian firms between 2003 and 2017, we provide novel results for a multitude of countries. We find that the null‐hypothesis (i.e., aggregate insider trading is not related to future stock market returns and thus corporate insiders cannot forecast economy‐wide trends) cannot be unanimously rejected for all 32 countries in the sample. Aggregate insider trading in the United States, Asia, China, Hong Kong, and India is coherently positively associated with future market returns according to two aggregate insider sentiment indicators. For Switzerland, Sweden, Poland, Malaysia, Singapore, and the Philippines we further find limited evidence indicating a positive association between aggregate insider trading and future index returns. On the contrary, there is some evidence that in Germany, Austria, Ireland, and Denmark aggregate insider trading is negatively associated with future market returns. Implications and further research opportunities are discussed.

Aggregate insider trading and the prediction of corporate credit spread changes

This paper shows that equity-based aggregate insider trading predicts future changes in US corporate credit spreads. Results suggest that the closer insiders are involved in daily business activities, the greater the predictive power of those insiders’ transactions is. In line with the literature, we reason and find that closely involved insiders are better at gauging future changes in cash flow realizations eventually affecting a firm’s default risk, because these insiders have greater access to in-firm information. The predictive power of aggregate insider trading doubles each time we increase the forecast horizon and each time when gradually increasing the level of default risk from BBB to CCC spreads. For the standard BBB–AAA spread, a univariate model explains up to 52% in annual credit spread change variation and is economically meaningful. An increase in one standard deviation in aggregate insider trading translates into a decrease of up to 72% of the standard deviation of annual credit spread changes. The predictive power of aggregate insider trading is neither just driven by the 2007/08 financial crisis, nor only by information conveyed from net purchasing or net selling insiders. Our results recommend portfolio and risk managers to take aggregate inside information and the heterogeneity among insiders into account when assessing future aggregate default risk.

Aggregate insider trading and market returns: The role of transparency

AbstractUsing a sample of countries that require timely disclosures of insider trades, I investigate the effect of country‐level institutions that promote transparency on the extent to which aggregate insider trades predict market returns. I find that financial information transparency mitigates the predictive content of aggregate insider trades when markets are more likely to deviate from fundamentals (i.e., during market fads), and when there is greater co‐movement in stock prices. In contrast, there is some evidence that governance and investor protection mitigate the association between aggregate insider trades and future earnings surprises. Hence, holding constant the timely disclosures of insider trades, other capital market institutions play complementary roles in mitigating the informational frictions that give rise to the predictive content of aggregate insider trades.

Does aggregate insider trading predict stock returns in China?

AbstractThis paper studies the information content of aggregate insiders' transactions in their own firms in China by analysing approximately 28,000 open market transactions from July 2007 to December 2014. The evidence suggests that publicly available information about aggregate insiders' transactions cannot predict future stock returns. However, the ability of aggregate insiders' transactions to predict future stock returns is positively associated with the strength of corporate governance. Results from vector autoregressive models and examination of profitable strategies corroborate these findings.

Aggregate Insider Trading and Market Returns: The Role of Transparency

Using a sample of countries that require timely disclosures of insider trades, I investigate the effect of country-level institutions that promote transparency on the extent to which aggregate insider trades predict market returns. I find that financial information transparency mitigates the predictive content of aggregate insider trades when markets are more likely to deviate from fundamentals (i.e., during market fads), and when there is greater co-movement in stock prices. In contrast, there is some evidence that governance and investor protection mitigate the association between aggregate insider trades and future earnings surprises. Hence, holding constant the timely disclosures of insider trades, other capital market institutions play complementary roles in mitigating the informational frictions that give rise to the predictive content of aggregate insider trades.

Aggregate Insider Trading and the Prediction of Credit Spread Changes

In this paper, we show aggregate insider trading to be a predictor of future changes in U.S. corporate credit spreads. In contrast to others who focus solely on the stock market, we fill a gap in the literature by finding a negative effect of the aggregate net position of insiders on credit spread changes. This effect is stable for various prediction horizons and is stronger for middle managers, insiders at firms with an investment grade rating and during the 2008/09 crisis. Furthermore, univariate models using this predictor achieve an adjusted R² up to 34 percent while a one standard deviation increase in aggregate trading translates into a decrease up to 78 percent of the standard deviation of credit spread changes. Our findings suggest accounting for differences among insiders may provide new guidance for investors who seek to diversify portfolios when investing in the U.S. corporate bond market, specifically in the medium run.

Insider competition under two-dimensional uncertainty and informational asymmetry

This paper shows that the consideration of two-dimensional uncertainty affecting cash flows and the existence of multiple, heterogeneously informed insiders provide reversed findings concerning aggregate insider trading profit and market liquidity. In particular, it is shown that heterogeneously informed insiders trade more aggressively. This sensitizes market makers and aggravates illiquidity. As a result, aggregate trading profit of two insiders is greater compared to one monopolist whereas traditional models state that competition increases liquidity and reduces total trading profit. Hence, from a welfare perspective, competition among insiders may be counterproductive.

Information Content of Aggregate and Individual Insider Trading

We examine the impact of aggregate insider trading on market returns in the UK. We find that, on aggregate, insiders are contrarians, but their trades are not informative, contrary to previous US evidence. We suggest that this discrepancy is related to the regulatory setting in the UK where insiders have to report their trades within six days. Then we analyse the short-run market reaction to insider trades and find that the information content of insider trading is limited to the period surrounding the announcement dates. We show that market-to-book, company size, stock volatility and market volatility have a significant impact on reporting period returns. In addition, we find that the market reaction is much weaker after controlling M/B and size. Finally, we show that insiders time in high volatile stocks, and following high market volatility.

Form 4 Electronic Submissions and the Thomson Reuters Insider Filing Data Feed: Discrepancies and Their Impact on Research

ABSTRACT This paper examines discrepancies between the electronic Form 4 and Thomson Reuters' Insider Filing Data Feed. The analysis shows differences in a small number of trades. The transaction code is the item frequently found to differ. Results also show that Thomson Reuters fails to follow its data codification policies. Users of Form 4 should expect discrepancies in trade and firm characteristics. Inferences about the market reaction to insider filings and trades, the association between aggregate insider trading and market returns, and cross-sectional variation in profitability of insider transactions do not appear to be significantly affected by these discrepancies. Overall, the evidence suggests that discrepancies between the electronic Form 4 and Thomson Reuters' Insider Filing Data Feed do not materially impact research. The results are consistent with observations made by the SEC suggesting that electronic filings facilitate research and data analysis and that the need for information intermediaries could be eliminated. Data Availability: Data are available from public sources identified in the paper.

“Swimming Ducks Forecast the Coming of Spring”—The predictability of aggregate insider trading on future market returns in the Chinese market

This study systematically examines the ability of aggregate insider trading to predict future market returns in the Chinese A-share market. After controlling for the contrarian investment strategy, aggregate executive (large shareholder) trading conducted over the past six months can predict 66% (72.7%) of market returns twelve months in advance. Aggregate insider trading predicts future market returns very accurately and is stronger for insiders who have a greater information advantage (e.g., executives and controlling shareholders). Corporate governance also affects the predictability of insider trading. The predictability of executive trading is weakest in central state-owned companies, probably because the “quasi-official” status of the executives in those companies effectively curbs their incentives to benefit from insider trading. The predictive power of large shareholder trading in private-owned companies is higher than that in state-owned companies, probably due to their stronger profit motivation and higher involvement in business operations. This study complements the literature by examining an emerging market and investigating how the institutional context and corporate governance affect insider trading.

Aggregate insider trading: Contrarian beliefs or superior information?

We decompose realized market returns into expected return, unexpected cash-flow news and unexpected discount rate news to test the relation between aggregate market returns and aggregate insider trading. We find that (1) the predictive ability of aggregate insider trading is much stronger than what was reported in earlier studies, (2) aggregate insider trading is strongly related to unexpected cash-flow news, (3) market expectations do not cause insider trading contrary to what others have documented, and (4) aggregate insider trading in firms with high information uncertainty is more likely to be associated with contrarian investment strategy. These results strongly suggest that the predictive ability of aggregate insider trading is because of insider’s ability to predict future cash-flow news rather than from adopting a contrarian investment strategy. These results hold even after we control for non-informative trades and information uncertainty.

Aggregate Insider Trading and the Predictability of Market Returns: Contrarian Strategy or Managerial Timing?

We decompose realized market returns into expected return, unexpected cash flow news and unexpected discount rate news to test the relation between aggregate market returns and aggregate insider trading. Our motivation is to distinguish whether the observed relation between market returns and insider trading is due to contrarian strategy or managerial timing. We find that (1) the predictive ability of aggregate insider trading is much stronger than what was reported in earlier studies (2) aggregate insider trading is strongly related to unexpected cash-flow news and (3) market expectations do not cause insider trading, contrary to what others have documented. These results strongly suggest that the predictive ability of aggregate insider trading is because of managerial timing rather than contrarian strategy. These results hold even after we control for information uncertainty by using firm size as proxies.

Aggregate Insider Trading and the Predictability of Market Returns: Contrarian Strategy or Managerial Timing?

Aggregate Insider Trading and the Predictability of Market Returns: Contrarian Strategy or Managerial Timing?

Do insiders crowd out analysts?

Both insiders and analysts are involved in the collection and dissemination of information to the market, roles which impact heavily on price efficiency and resource allocation. The differences between the two groups, however, result in a competitive relationship with analysts at a disadvantage due to greater costs associated with information gathering. As a result they may choose not to participate in this one-sided competition. We employ transaction data to examine the impact of firm-year aggregate insider trading intensity on the level of analyst following. We find a negative relationship between the prevalence of insider trading and analyst coverage lending support to the crowding out hypothesis.

Reducing the Profitability of Corporate Insider Trading With Pretrading Disclosure

Over the last six decades, the federal government has constructed an extensive system of civil and criminal laws designed to reduce the ability of corporate insiders to make profits trading on inside information. During the 1980s, the government sought to increase the system's effectiveness by increasing penalties and devoting more resources to enforcement. However, both the volume of trading by corporate insiders and the profits these insiders make from corporate insider trading have increased dramatically since these measures were put into effect. In fact, I calculate that corporate insiders make almost $5 billion per year in insider trading profits. After surveying the evidence that corporate insiders trade on inside information, this Article explains why insiders are able to engage in such trading. The Article then puts forward a simple method for reducing insiders' ability to make profits trading on inside information: requiring insiders to disclose publicly their intended trades shortly before submitting orders to their brokers. The Article shows that this pretrading disclosure rule could substantially reduce aggregate corporate insider trading profits. The Article also explains how adopting a pretrading disclosure rule would enable the government to eliminate some of the existing restrictions on insiders' trading and thereby reduce the overall regulatory burden on insiders.