Insider Purchases Research Articles

Insider Trading and CEO Pay-Gap Induced Turnover

We explore how insider trading returns, disparities in executive pay, and CEO turnover are interrelated. Our findings reveal both independent and interactive effects for insider trading returns, the CEO pay gap, and the likelihood of CEO turnover. First, an increase in abnormal returns from insider purchases lowers the probability of a CEO’s turnover, while an increase in abnormal returns from insider sales increases the likelihood of a CEO’s dismissal. Second, the CEO pay gap negatively affects the probability of CEO turnover for insider purchases, but it does not have a similar effect on insider sales. Third, the interaction between insider abnormal returns and any CEO pay disparity influences the impact of these returns on CEO turnover. Specifically, this interaction diminishes the positive effect of insider selling on the probability of a CEO’s dismissal, offsets the negative effect of insider purchasing on CEO dismissal, and, finally, amplifies the negative impact of CEO pay disparity on the probability of a CEO’s dismissal during periods witnessing insider purchases.

Insider trading profitability in geographically diversified firms: does managerial ability matter?

ABSTRACT We examine the impact of managerial ability on insider trading profitability within geographically diversified firms, where operational complexity can potentially increase insider advantages. We analyse a sample of 54,899 insider purchase transactions and find that higher managerial ability significantly reduces the positive relationship between geographical diversification and insider trading profitability. Our mechanism tests suggest that managers with higher abilities make better information disclosure and collaborate with more capable boards, to reduce insider trading profitability. Our findings suggest that capable managers prioritize enhancing transparency and aligning interests with shareholders above personal financial gains, reducing opportunistic insider trading within geographically diverse firms.

Corporate insider purchases and the options market: Competition among informed investors

Corporate insiders have superior access to information; their trades, particularly purchases, should be informative. However, the extent of their informational advantage may be limited by the presence of other informed market participants. We document less frequent insider purchases in stocks with relatively high options trading activity. These purchases are followed by negligible abnormal returns. In contrast, stocks with less active options trading experience more frequent insider purchases, which yield positive abnormal returns over the subsequent six months. Our novel approach highlights the options market's role in screening uninformed insider trades, which ultimately contributes to more efficient stock market price formation.

The Performance Analysis of Trading Strategies Based on Insider Silence

Abstract Seyhun (1986) argues that insider buying predicts positive future returns, while insider selling reveals only a slight signal to predict negative future returns, possibly to satisfy liquidity needs. Gao et al. (2021) find that insiders are afraid of exposure to litigation risk, they neither sell their stocks on bad news nor buy, so insiders keep silent. Based on Gao et al. (2021), we construct the portfolio, which is to buy the “insider sell” group and to sell the “insider silence” group. According to Johnson and So (2012), the O/S portfolio is constructed based on the ratio of individual stock options to the trading volume of the underlying stock. F/S portfolio is constructed by the ratio of individual stock futures to the trading volume of the underlying stock. We find that under the holding period of more than one year, the performance of insider trading strategy is better than other strategies. Specifically, “buying insider purchases and selling insider sales” strategies are more profitable with longer holding periods. Moreover, the longer the holding period of OS and FS strategies, the greater the negative return effect. JEL classification numbers: G11, G12, G14. Keywords: Insider trading, Insider silence, OS strategy, FS strategy, and one-dimensional strategy.

Corporate Insider Purchases and the Options Market: Competition among Informed Investors

Corporate Insider Purchases and the Options Market: Competition among Informed Investors

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.

The dual purpose of insider trading: Signaling quality and battling shorts

This paper contributes to explaining the benefit-cost puzzle of insider trading activity. We show that net insider purchase is a convex function of the quarterly earnings surprise decile in terms of mean, median, and purchase frequency. The convexity suggests that the magnitude of net insider purchases is positively associated with information asymmetry. Further evidence indicates that the majority of insider purchases are not designed to earn abnormal returns; instead, they signal firm quality when firms are in adverse situations and fight against short sellers when short interest is high.

INSIDER TRADING AND CORPORATE SPINOFFS

The study reported here examines insider trading and the issue of undervaluation as a motive behind corporate spinoffs. The results show an unmistakable increase (decrease) in the number of insider purchases (sales) and net purchases (sales) in the four quarters prior to a spinoff announcement. In addition, relative to a benchmark period, insider selling is significantly lower, and their net purchases significantly higher, in the three quarters prior to a spinoff announcement, as compared to other periods. Furthermore, announcement period excess returns for abnormal net insider purchases are significantly higher than excess returns for abnormal net insider sales. However, only firms with abnormal net insider purchases exhibit significant improvement in their long-run market and operating performance after a spinoff. The results seem to suggest that undervaluation is an important motive behind corporate spinoffs and that it is possible to identify the quality of a spinoff firm based on insider trading behavior prior to its announcement.

Do insiders trade on innovation?

We find that pure insider share purchases—which we define as insider purchases over two successive years without any corresponding sales—are a strong predictor of a firm’s patent applications. The predictability increases with the quality of the patent: Applications for the highest-quality, breakthrough patents increase by 21% in the year following pure insider purchases in our sample. These purchases are associated with large abnormal stock returns of 1.1% per month (14% annualized) over the subsequent three-year period. We also document that stock price responds less to the subsequent announcement of the grant of patent if the application for the patent has been preceded by pure insider purchases, consistent with the idea that insider purchases reveal information about future firm innovation. Our evidence has implications for understanding insider trading within technology companies that have become a dominant feature of US stock markets in recent decades.

Capital market liberalization and opportunistic insider sales: Evidence from China

This study examines the causal effect of stock market liberalization on opportunistic insider sales. Using China’s “Shanghai/Shenzhen-Hong Kong Stock Connect” pilot programs as quasi-natural experiments, we find that liberalizing China’s equity market to foreign investors can help restrain the opportunistic selling behavior of managers by complementing traditional legal enforcement and regulation mechanisms. We further identify-two main plausible mechanisms that support our results: decreased insider trade profitability and reduction of private information accessibility. The effects of liberalization are particularly pronounced for firms with high information asymmetry and weak corporate governance, non-state-owned enterprises (non-SOEs), and those located in regions with a high marketization level. Our findings also show a similar pattern of insider purchases, which mitigates the potential concern of insider update beliefs. Overall, we highlight the market-oriented discipline role played by foreign investors and the beneficial resultant of capital market liberalization; we also provide direct implications to policy makers and other emerging countries who aim to liberalize their capital markets.

Insider trading, gender diversity within the board room, CEO pay gap, and stock price crash risk

AbstractThis paper investigates the impact of insider trading and managerial attributes on future stock price crashes. We conduct a series of regressions addressing the managerial attributes determinants of future stock price crashes including gender diversity, CEO age, and CEO power (measured by CEO pay disparity, CEO tenure and CEO duality). Our empirical results reveal a positive association between insider purchases and price crash risk. This implies that other than compensation and career concerns, insiders hoard bad news to fulfil their trading incentives. Our positive coefficients of insider sales also suggest that insider sellers can assess inside information promptly and anticipate shortly before the crashes. We further document that the presence of female directors on boards can mitigate stock price crash risk. However, firms with powerful or younger Chief Executive Officers are more likely to experience crashes. Overall, we highlight the importance of corporate managerial attributes in dealing with information asymmetry problems.

내부자거래와 정보비대칭의 관계에 관한 연구

This study analyzes the pre-transaction period accounting earnings-stock price relation among companies with and without insider trade(insider sell and buy) to find out whether information asymmetry increase potential insider’s profit, thereby, motivate insider to trade their own stocks.
 In order to figure out correct relationship between insider trading and information asymmetry, this study recognize succesive insider trading, and use only first trade observation of succetive insider sell and buy, respectively. Therefore the total number of stocks and the first trade of each successive insider tradings are respectively presumed as an insider trading volume and as an observation of the the succesive insider trading.
 Also, all ownership information of directors and major shareholder is cellected from DART using Python, and quarterly financial information is used for our analysis to alleviate the possible problem coming from assumption of period of insider trading.
 The analysis period is from 2012 to 2018, and non-financial companies among listed companies on the Korea Stock Exchange and KOSDAQ are targeted.
 Empirical analysis shows as follow.
 First, it was found that the greater the over-estimate of earnings-return relation incurs greater probability of occurrence of insider stock sales and greater insider sales stock volume. These relationships are larger and more significant than those between insider trading and future earnings level, future earnings growth, and future stock return, which represent insiders' information advantage on future prospects of the firm. Second, the effect of estimation bias of earnings-return relation on the probability of insider sales was stronger and more immediate than those of insider purchases. The positive relationship between future prospects and insider trading, reported in previous studies, was stronger in insiders purchases than in insider sales.
 This study directly analyzed whether information asymmetry between insiders and external stakeholders plays a major role of insider trading, comparing pre-period earning-return relation estimates of insider trading firms with those of control firms. It is also meaningful in that it shows that the information asymmetry difference between insiders and external stakeholders can have different effects on insider trading for different properties of insider sales and purchase.

Economic policy uncertainty and insider trading

AbstractIn this article, we examine the effects of economic policy uncertainty (EPU) on insider trading. Two hypotheses predict that EPU is positively related to insider trading volume and profitability: (1) the private benefits hypothesis, which states that insiders exploit their information advantage to realize abnormal profits, and (2) the signaling hypothesis, which states that insiders trade to signal private information to stock market participants. We find that EPU is positively and significantly related to the profitability of insider purchases, and that insiders purchase more frequently during high‐EPU periods. Additional analysis provides strong support for the signaling hypothesis but no support for the private benefits hypothesis.

I only fear when I hear: How media affects insider trading in takeover targets

We study how target firm insiders respond to Wall Street Journal articles referring to illegal insider trading in past mergers. Such articles lead to target insider share purchases before bid announcement to drop by 75%. This effect is stronger nearer the bid announcement and increases with article visibility. It remains significant after controlling for public enforcement intensity, but is weakened by the greater potential for profitable trading. Our results suggest insider trading articles temporarily heighten the perception of litigation and reputation risks. Overall, our study indicates that such articles have a meaningful short-term deterrence effect on opportunistic insider trading, and highlights the disciplinary role of the media. • We document a deterrence effect of media on insider trading. • Insider purchases before M&A drop 75% after WSJ news on past insider trading cases. • Articles temporarily heighten perception of litigation and reputation risks. • Effect is stronger nearer bid and increases with article visibility. • Effect remains unaffected by enforcement but weakened by potential trading profits.

Insider Trading at Zagreb Stock Exchange

Abstract This paper is the first paper that systematically observes and describes all publicly available data on insider trading on the Zagreb Stock Exchange during the period of June 2010 - June 2021. To accomplish this objective both parametric and non-parametric event-study tests are conducted using the data collected from 827 notifications published on the Zagreb Stock Exchange website. After filtering the notifications for overlapping events, there were 48 insiders’ purchase events and 50 insiders’ sales events. The results indicate that insiders can earn abnormal returns on share purchases based on their insider knowledge and that the information on insider purchases can bring additional information to outside investors. However, in the case of notifications of share sales by insiders, Cumulative Average Abnormal Returns (CAARs) after the event are not statistically significant and are just slightly positive, thus bringing no abnormal returns for insiders and not conveying information to the public. This suggests that the market may perceive sales having a lower informational content, as motivation for sales may be other needs, such as liquidity.

Testing the Insider Trading Anomaly in FTSE-350.

In recent studies, numerous anomalies against the weak and semi-strong-forms of efficient market hypothesis (EMH) have been found insignificant after controlling the small-firm effect. We investigate whether the insider trading anomaly, a major anomaly against the strong-form of EMH, can survive after excluding small firms with a novel data set (FTSE-350) and document several new findings. We find a substantially larger number of insider purchases than sales, while the average volume of insider sales is much higher than the average volume of insider purchases. Echoing recent US studies, we find that insider sales generate more abnormal returns than insider purchases do. We find much lower abnormal returns from insider trading than documented in the literature and the associated trading costs, which suggests that the market efficiency of individual stocks may depend on their sizes, and even the strong-form of EMH holds to a larger extent than previously recognized.

Do insiders trade on government subsidies?

We examine whether and how insiders trade on government subsidies, a major instrument through which the governments intervene in the economy. Using a novel dataset of government subsidies of Chinese listed firms, we find that net insider purchase increases significantly during the month of subsidy receipt. The effect of subsidies on insider trading is weaker in firms with a more transparent information environment and when subsidies are granted in a more predictable manner. In contrast, the effect is more pronounced for politically connected firms. Further analysis shows that the subsidy-trading relation may reflect both insiders’ informational advantage concerning subsidies and their superior ability to detect mispricing-related opportunities. Our findings provide new insights into the capital market consequences of government subsidies through the lens of insider trading.

Institutional ownership and insider trading profitability: Evidence from an emerging market

As institutional investors play a significant role in improving corporate governance and stabilizing the stock market in China, we test whether and how institutional ownership affects insider trading profitability in China. Our empirical findings show that institutional ownership reduces the profitability of total insider trading and insider sales but increases the profitability of insider purchases, which is consistent with the difference between Chinese regulators' attitudes toward insider sales and their attitude toward purchases. Our findings are robust to the inclusion of firm fixed effects, alternative proxies and the consideration of self-selection bias and endogeneity problems. The mediation analyses indicate that institutional investors reduce the agency costs associated with insider trading mainly through their direct rather than indirect monitoring activities. Moreover, we find that the effect of institutional ownership on insider trading is most prevalent in firms that are non-state-owned enterprises and that have high insider ownership, which validates the governance role of institutional investors. Furthermore, we find that insider trading profitability is significantly affected by firms' ownership by pressure-resistant institutional investors, but not by firms' ownership by pressure-sensitive institutional investors.

Profits to opportunistic insider trading before and after the Dodd-Frank act of 2010

PurposeThe authors examine if opportunistic insider trading profits decrease after the enactment of the Dodd-Frank Act (DFA) in 2010. The DFA expands legal prohibitions on insider trading in the USA.Design/methodology/approachThe authors identify opportunistic insider trades following a method that is outlined in Cohen et al. (2012). The authors examine univariate statistics and perform multivariate regression tests to examine opportunistic trading profits before and after the DFA. Similar multivariate regression tests have been used widely in the literature to examine the profitability of insider trades.FindingsThe authors find that opportunistic insider purchases were highly profitable before the DFA. Profits after opportunistic purchases were significantly lower after the DFA. Opportunistic insider sales were contrarian trades both before and after the DFA. However, share prices kept increasing after insiders sold their shares.Originality/valueTo the best of the authors’ knowledge, the paper is the first study that compares the profitability of opportunistic insider trades, as identified by Cohen et al., before and after the DFA. The study contributes to the literature that finds that insiders change their strategic trading behavior when the potential costs of the illegal trading increase due to regulatory action.

Insider trade clustering and large variations in stock prices: evidence from the Korean market

ABSTRACT This paper examines whether insider trade clustering is associated with large stock return variations (i.e. crash or jump risk) in Korea. To investigate private information of insider trade clustering, we separate insider trade clustering into sale clusters and purchase clusters and then document whether trading behavior of insider sale (purchase) clusters is related to the likelihood of a crash (jump). We find that insider sale clusters which occurred over the past month of a crash are strongly related to the information flowed over a short period of time. However, we find that insider purchase clusters are less associated with the likelihood of a jump. Our results provide empirical evidence that insiders share negative information and insider sale clusters contain robust short-lived information. Overall, our findings suggest that insider trade clustering, in particular insider sale clusters, results from agency problems.