Insider Trading Patterns Research Articles

Profitability of insider trading in Turkey

This study presents the first comprehensive evidence of insider trading patterns and abnormal profits in the Turkish stock market using almost 65,000 insider transactions for the period of 2008–2019. Our findings show that insiders earn a significant 6.58% abnormal profit during the one year following insider trading. Officers, directors, and institutional investors earn even more. Both purchases and sales are profitable. Top executives, major shareholders, and institutional investors earn significant dollar profits. Additionally, uninformed investors can beat the market by mimicking the portfolios of insiders, while evidence shows that regulatory changes do not reduce insiders’ profits. Finally, this study provides important trading implications for investors and regulatory implications for policymakers everywhere.

Insider Trading Profitability in Turkey

This study presents the first large-scale, comprehensive evidence on the insider trading patterns and abnormal returns in the Turkish stock market. Starting with a summary of the legislation, an event study methodology is used to compute daily abnormal returns of almost 65,000 insider transactions. Findings show that insiders earn 1.56 percent more than the market average return on the first six days following the trading day. The highest abnormal returns are earned by small firm insiders. Top executives, officers, directors, legal entities, funds, and large shareholders earn significantly higher than the market average return. Short-term and midterm abnormal profits vary with size, the value of the trade, holdings of the insider, relation of the insider with the company, number of insiders within a company, and whether the transaction is a sale or purchase.

Sell-side analyst heterogeneity and insider trading

This study explores insider trading patterns under different earnings surprises. After controlling for stock market liquidity and earnings announcements returns, we show that insiders sell more aggressively depending on the heterogeneity of analysts whose EPS forecasts are met or beaten to camouflage their trades. Specifically, insiders sell more shares of their company sooner after the publication of earnings when top analysts' forecasts are met or beaten. Consistent with the informed trading literature, insiders strategically select these moments because the stock price impact is low and the legal scrutiny of their trades is minimal. To support this result, we employ an exogenous drop in firms' analyst coverage due to the closure or merger of brokerage houses. Furthermore, in line with the camouflage incentives, by selling after top analysts' forecasts are met or beaten, stock prices adjust slowly to insider trades. Finally, we show that the incentives of insiders to hide their trades are concentrated in opportunistic insiders and members of the top management team, who are more likely to bear the costs of selling shares after positive news.

Insider trading patterns

We revisit the information content of stock trading by corporate insiders with an expectation that opportunistic insiders will spread their trades over longer periods of time when they have a longer-lived informational advantage, and trade in a short window of time when their advantage is fleeting. Controlling for the duration of insiders' trading strategies, we find robust new evidence that both insiders' sales and purchases predict abnormal stock returns. In addition, we provide evidence that insiders attempt to preserve their informational advantages and increase their trading profits by disclosing their trades after the market has closed. When insiders report their trades after business hours, they are more likely to engage in longer series of trades, they trade more shares overall, and their trades are associated with larger abnormal returns. Finally, we show how accounting for these trading patterns sharpens screens for corporate insiders who trade on infor- mation.

AN OVERVIEW OF INSIDER TRADING IN BORSA ISTANBUL

W e analyze insider trading patterns in firms listed in Borsa Istanbul using a unique and most comprehensive regulatory dataset for the first time. The dataset provided by Turkey’s Central Securities Depository contains the number and volume of insiders’ buy and sell transactions during the period 2009 – 2015. We observe that (i) corporate insiders are active traders in Turkish stock market, (ii) the trading patterns vary across different sized firms, and finally, (iii) insiders at different positions trade differently. This study enhances understanding of insider trading behavior in an emerging market. Furthermore, our results have important implications for regulatory authorities who are responsible to maintain well-functioning financial markets which will facilitate increased prosperity and economic growth.

Sell-Side Analyst Heterogeneity and Insider Trading

This study explores insider trading patterns after different earnings surprises. After controlling for stock market liquidity, we show that insiders sell more aggressively depending on the heterogeneity of analysts whose EPS forecasts are met or beaten to camouflage their trades. Specifically, insiders sell more shares of their company sooner after the publication of earnings when top analysts' forecasts are met or beaten. Consistent with the informed trading literature, insiders strategically select these moments because the stock price impact is low and the legal scrutiny of their trades is minimal. To support this result, we employ an exogenous drop in firms' analyst coverage due to closure or merger of brokerage houses. Furthermore, in line with the camouflage incentives, by selling after top analysts' forecasts are met or beaten, stock prices become less efficient as they adjust slowly to insider trades. Finally, we show that the incentives of insiders to hide their trades are concentrated in opportunistic insiders and members of the top management team, who are more likely to bear the costs of selling shares after positive news.

Trading by bank insiders before and during the 2007–2008 financial crisis

This paper investigates whether bank executives took excessive risks in the run&up to the recent financial crisis by analyzing their trading in their own bank’s stock. I examine whether insiders of banks with the highest exposure to subprime risk changed their insider trading before the onset of the crisis. Two main findings emerge. First, there are large differences in insider trading patterns between high& and low&exposure banks start ing in mid&2006, when US housing prices first declined. The economic effect is sizeable: insiders of high&exposure banks sell 30% more equity than insiders of low&exposure banks. This in crease in insider sales precedes the fall of bank stock prices and the surge in banks’ CDS spreads by at least 12 months. Second, there is no difference in insider trading patterns between banks with high and low exposure in 2004&2005. I conclude that insiders of high&exposure banks revis ed their views on the profitability of their banks’ investments following the reversal in the housing market.

Trading strategies of corporate insiders

We test two complementary theories of optimal trading strategies by analyzing the transaction patterns of corporate insiders. According to information-based theories, investors trade faster if they compete with others for exploiting the same information, while liquidity-based theories predict the opposite. Our analysis supports the predictions of liquidity-based models: insiders take longer to complete trades when they face competition from other insiders and they trade slower in less liquid markets. Insiders adapt to fluctuations in market liquidity. We identify informed trading using CARs, company news announcements, and insider trading patterns. Our results support the predictions of information-based models for informed trades.

The Cause of the Asset Growth Effect: Evidence from Insider Trading

This study investigates the potential causes of a recent empirical regularity in the financial markets — the asset growth effect (Cooper et al., 2008) — by examining insider trading patterns. Insiders have a sophisticated understanding of their own firms, which they often use to trade on misevaluation. This study shows that insiders exploit the trading opportunities suggested by the asset growth effect, suggesting that the asset growth effect results from misevaluation instead of a rational discount result, as proposed by Watanabe et al. (2013). We further identify the specific information underlying asset growth that the stock market misevaluates. We show that the asset growth effect is more likely to be caused by a market misunderstanding of growth firms’ real investment activities rather than accounting disclosure distortion (e.g., earnings management before an acquisition or IPO). A comparative analysis between CEO and CFO trading indicates that insiders do not all have the same insight as to the asset growth effect. While CEO trading leads to 13.2 percent more size-adjusted returns beyond the return to the asset growth effect (20.3 percent), CFO trading does not provide any incremental returns to investors. Based on such findings, this study proposes that when relying on insider trading to understand the asset growth effect, investors need to distinguish the roles of different insiders.

Trading by Bank Insiders Before and During the Financial Crisis

This paper sheds new light on the role bank executives played in the financial crisis. It examines whether they foresaw the poor performance of their own bank by analyzing their insider trading patterns. Insider trading during 2006 predicts stock returns during the crisis: a portfolio strategy based on insider trading information earns a risk-adjusted return of over 40% during the crisis. Further, banks with a high exposure to the housing market and banks with a low exposure exhibit different insider trading patterns starting in mid-2006, when US housing prices first decline: insiders of high-exposure banks are 20% more likely to sell stock than insiders of low-exposure banks. However, insider trading patterns of high- and low-exposure banks do not differ before 2006. This evidence indicates that insiders of high-exposure banks revised their assessment of their banks’ investments following the reversal in the housing market.

Financing Decisions and Discretionary Accruals: Managerial Manipulation or Managerial Overoptimism

We examine whether discretionary accruals of firms obtaining substantial external financing can be explained by managerial manipulation or managerial overoptimism. Insider trading patterns and press releases around equity and debt financing suggest that managers are more optimistic about their firms around debt financing. Consistent with earlier studies, we find that discretionary current accruals peak when firms obtain equity financing. However, we also find that discretionary accruals peak when firms obtain debt financing. Moreover, discretionary accruals are higher for firms that rely on debt rather than on equity financing. The results are robust to controlling for firm characteristics, excluding small and distressed firms, and using alternative measures of discretionary accruals. These findings support the hypothesis that managerial overoptimism distorts financial statements of firms obtaining external financing.

Explaining the Accruals Anomaly: Evidence from Insider Trades

We examine competing explanations of the accruals anomaly, fixation and agency, using insider trading patterns and valuation measures. Quadratic regressions which control for confounding effects confirm an asymmetric relationship between trades and accruals concentrated on the selling side, supporting an overvalued equity agency explanation. Further evidence is provided by tests using valuation. The relationship between accruals and trading is only significant within the low book-to-market (BM) firms. There is also evidence that high BM firms manage their earnings upward compared to low BM firms. Tests using a subset of firms sorted on valuation ratios and past growth also support the agency explanation with evidence of a strong relationship between sales and accruals for the glamor firms while buying and accruals are not related for the value firms.

Regulated and unregulated insider trading around earnings announcements

This paper analyses insider trading behaviour around annual and interim earnings announcements during changing legislative environments in Sweden from 1980 to 2003. Using a unique data set, we are able to explore the nature of insider trading patterns from unregulated to strongly regulated insider trading markets. We find limited evidence of opportunistic insider trading. Insiders seem to be reluctant to sell stocks before positive earnings announcements. They also tend to time their trades in conjunction with an immediate post-announcement period, i.e. “safety trading”, which becomes more evident within stronger legislation environments. Some support for contrarian trading behaviour is also found.

Market Timing and Managerial Portfolio Decisions

ABSTRACTThis paper provides evidence that top managers have contrarian views on firm value. Managers' perceptions of fundamental value diverge systematically from market valuations, and perceived mispricing seems an important determinant of managers' decision making. Insider trading patterns shows that low valuation firms are regarded as undervalued by their own managers relative to high valuation firms. This finding is robust to controlling for noninformation motivated trading. Further evidence links managers' private portfolio decisions to changes in corporate capital structures, suggesting that managers try to actively time the market both in their private trades and in firm‐level decisions.

Do Underwriters Collaborate with Venture Capitalists in Ipos? Implications and Evidence

We test for potential collaboration between underwriters, venture capitalists, and other major owner managers in initial public offerings (IPOs). We find that VCs who are more loyal and tolerate higher underpricing receive long-term marketing support and favorable analyst revisions, allowing them to exit at high prices. Cooperating underwriters receive repeat business and more profits from allocating underpriced shares. The end of this extended support coincides with heavy insider selling and significantly negative abnormal returns. VCs enforce cooperation by switching lead underwriters when favors are not returned. Our collaboration hypothesis resolves some previously surprising findings regarding underpricing, long-term underperformance, insider trading patterns, and analyst research.

Does Overvaluation Lead to Bad Mergers?

Using managers' personal trading decisions as a window into their belief on firm's valuations, this paper directly examines whether overvaluation is a motive for acquisitions and provides evidence on the consequences of overvalued equity. My findings show a sharp contrast in the behavior of acquirer's insiders between the earlier period and the 'hot market' period of the late 1990s. Moreover, the strong relation between insider trading patterns prior to the acquisition announcement and long-run post-acquisition performance in the later period suggests that acquisitions by overvalued companies are value-destroying and the poor subsequent stock performance is not only a correction of overvaluation.

Reexamination of the link between insider trading and price efficiency

This paper investigates insider trading patterns around quarterly earnings announcements of the companies listed on the Warsaw Stock Exchange. The results are generally consistent with the notion that insiders exploit their foreknowledge of accounting disclosures but cease trading aggressively immediately before the publication date. Their informed trading is shifted to an earlier period in order to make it less explicit and minimize the danger of possible legal action. Furthermore, insider dealing has been shown to have a negligible net effect on stock price efficiency, as the benefits of information transmission are likely to be counterbalanced by the reduction in information acquisition by outsiders. In particular, it has been shown that the market professionals are reluctant to follow companies in which insiders trade actively.

Market Timing and Managerial Portfolio Decisions

This paper provides evidence that top managers have contrarian views on firm value. Managers' perceptions of fundamental value diverge systematically from market valuations, and perceived mispricing seems an important determinant of managers' decision making. An analysis of insider trading patterns shows that low valuation (value) firms are regarded as undervalued by their own managers relative to high valuation (growth) firms. This finding is robust to controlling for non-information motivated trading. Managers in value firms actively purchase additional equity on the open market despite substantial prior exposure to firm risk through stock and option holdings, equity-based compensation and firm-specific human capital. Further evidence links managers' private portfolio decisions directly to changes in corporate capital structures, suggesting that managers actively time the market both in their private trades and in firm-wide decisions. Keywords: Market timing, Insider trading

Financial analysts' earnings forecasts and insider trading

In our paper we consider whether a firm's insiders utilize their foreknowledge of forthcoming earnings when trading in their own firm's stock. We analyze insider trading patterns both before and after earnings are announced. We also examine financial analysts' earnings forecast revisions following insider trading. Test results show increased insider purchases (sales) prior to the announcement of good (bad) earnings news. Our results also show that insiders delay the purchase (sale) of stocks until after bad (good) earnings news is announced. Finally, we find that financial analysts' earnings forecast revisions are positively (negatively) related to insider purchases (sales). These results are consistent with insiders trading on private information about forthcoming earnings.