Insiders Buy Research Articles

How informative are insider trades and analyst recommendations?

This study evaluates the interactions between, and informativeness of, insider trading and analyst recommendations. We find that analyst recommendations significantly affect subsequent insider trading, but not vice versa. Surprisingly, in aggregate, insiders buy more shares following analyst downgrades and sell more shares following upgrades. This pattern persists even after controlling for analysts’ momentum and insiders’ contrarian trading preferences. Analysts, in contrast, do not systematically take into account insider trading when revising their recommendations. More importantly, we show that these two information signals complement each other although insider buying could be a singularly strong signal that substitutes the informativeness of analyst recommendations under certain circumstances. Overall, our findings highlight the important dynamics and financial market consequences between the two crucial groups of information providers.

Insiders’ characteristics and market timing capabilities: buying and selling evidence

PurposeThis paper aims to study individual managers’ market timing capabilities while trading (either buying or selling) stock from their portfolios, as well as the impact of gender, seniority and trading frequency on their market timing performance.Design/methodology/approachThis study uses a relative transaction price approach introduced by Dittmar and Field (2015) on 837 aggregated trades made by managers from their portfolios between 2010 and 2015. These were taken from publicly disclosed information through the Portuguese regulator. Furthermore, this study uses a median regression-based method to infer the authors’ conclusions.FindingsThe authors find that insiders buy (sell) at a relatively lower (higher) price when compared to other traders. This evidence shows that insiders have market timing capabilities. Moreover, this paper shows that contrarily to gender, both seniority and frequency help explain market timing performance and that insiders’ trades made over-the-counter (OTC) generally overperform the ones made on the open market (OM). Finally, this study finds a significant crisis-related influence on insiders’ market timing performance.Originality/valueThis study contributes to the literature by studying insider trading at the portfolio level, by analyzing the impact of personal characteristics of insiders (including gender, tenure and eagerness), focusing both on studying the buying and selling behavior across both OMs and OTC and analyzing firsthand the impact of a macroeconomic shift on insider trading performance.

Trading against the Grain: When Insiders Buy High and Sell Low

Both behavioral biases and informational advantages can drive insider trades. The authors document that US corporate insiders anchor on the 52-week low (high) for stock purchases (sales). They then find that insider trades made when stock prices are far from their anchor levels are more informative, suggesting that when insiders trade against the anchoring bias, private information is providing the catalyst to overcome the bias. The authors further show that outside investors can reap sizeable abnormal returns by piggybacking on insiders who make these buy-high, sell-low trades. TOPICS:Exchanges/markets/clearinghouses, information providers/credit ratings Key Findings • Corporate insiders are subject to anchoring bias when they trade. They tend to buy (sell) more when the stock price is near its anchor—the 52-week low (high). • Private information can help insiders overcome the anchoring bias. When insiders buy high and sell low, their trades are informative. • Outside investors can piggyback these “buy high and sell low” trades and reap sizeable returns.

Strategic timing of corporate insiders when trading at earnings announcements

This paper provides new evidence that insiders exploit their stock’s mispricing after earnings announcements rather than their foreknowledge of future cash flows to make profitable trades. Insiders buy and sell more intensively shortly after the publication of earnings (from day 0 to +5) in response to market reaction to earnings announcement, and the explanatory power is higher relative to book-to-market and long-term past returns. Also, in line with insiders trading on mispricing, insiders’ purchases and sales are profitable both after positive and negative earnings surprises, which indicates that their trading strategies are superior to simple contrarian or momentum strategies.

Trading Against the Grain: When Insiders Buy High and Sell Low

Both behavioral biases and informational advantages can drive insider trades. We first document that U.S. corporate insiders anchor on the 52-week low (high) for stock purchases (sales). We then find that insider trades made when the stock price is far away from its anchor levels are more informative, suggesting that when insiders trade against the anchoring bias, private information is providing the catalyst to overcome the bias. We further show outside investors can reap sizeable abnormal returns by piggybacking on insiders who make these “buy high and sell low” trades.

After-Hours Block Trading, Short Sales, And Information Leakage: Evidence From Korea

We investigate the impact of insider trading in after-hours block market on stock price and short sales volume, before and after the trading becomes public information. During pre-announcement period, positive (negative) abnormal stock return is generated when insiders buy (sell) their shares but does not when quasi-insiders trade, implying that stock price reflects long-lived private information of corporate governance structure. The impact is most prominent when ownership shares are transferred to (from) corporate insiders. In contrast, short sales volume generally does not depend on the identity of block holders. Short sales volume has a negative correlation with abnormal stock return only during the transaction date, indicating that a short-sale decision of tippees is based on their sole expectation on instantaneous stock returns. We also find evidence that insiders select the timing of their trades with respect to maximizing their realized profits or minimizing their purchasing costs.

Bond repurchase objectives and the repurchase method choice

This study investigates how firm׳s bond repurchase objective affects its choice of repurchase method. Unlike tender offers, open-market repurchases are not pre-announced and buyer׳s identity is unknown to the seller. We provide evidence that firms are likely to repurchase on the open-market when bonds are mispriced and when firms seek to manage their financial reports, either to meet earnings targets or avert debt covenant violations. When firms seek to amend indenture terms, they prefer tender offers. We also find that firm׳s information quality affects the likelihood of mispricing exploitation behavior and that insiders buy firm׳s stocks around open-market repurchases.

Relative idiosyncratic volatility and the timing of corporate insider trading

This paper investigates whether corporate insiders trade when asymmetric information is high, using data on U.S. corporate insider transactions between 1986 and 2012. We generalize the literature focusing on insider trading around the announcement of different categories of corporate events. The key innovation of this paper is our asymmetric information proxy relivol, which measures deviations of idiosyncratic volatility from a firm's normal level. Our findings suggest that relivol positively predicts insider purchases, indicating that insiders buy shares when their informational advantage is high. However, insiders appear to sell less when relivol is high, which is consistent with existing evidence on sales being driven by alternative, non-information-related trading motives such as liquidity or diversification needs. Furthermore, we find that profits are significantly higher when insiders buy during periods of high relivol but not when they sell shares.

Buy on Bad News, Sell on Good News: How Insider Trading Analysis Can Benefit from Textual Analysis of Corporate Disclosures

We demonstrate how insider trading analysis may benefit from textual analysis. We analyze reported insider trading behavior and explain the association between corporate as well as 3rd-party news announcements on directors’ dealings activity. Previous approaches are extended by adding the sentiment of news to the research setting. We find strong evidence that insiders follow the stock market adage “Buy on bad news, sell on good news”: They tend to buy (sell) securities in those years where their respective companies issue negative (positive) news. Likewise, insiders tend to buy (sell) stocks in years when 3rd-party news coverage is pessimistic (optimistic). The impact of corporate news on insider trading is higher than for 3rd-party news, as corporate news are subject to direct influence by the insiders. We also find that insiders buy when next year’s news improves compared to the current year. Looking more concretely into the language, we also demonstrate that insiders buy when expressing insecurity and uncertainty. Overall, the findings reveal additional insights for insider trading analysis and demonstrate how finance may benefit from textual analysis.

Time‐Varying Liquidity Trading, Private Information and Insider Trading

AbstractThis paper investigates the insider trading before scheduled versus unscheduled corporate announcements to explore how corporate insiders utilise their private information in response to the time‐varying liquidity trading. Using a comprehensive insider trading database, we show that: (1) the insider's propensity to trade increases in the amount of liquidity trading before both the scheduled and unscheduled announcements; (2) insiders buy (sell) more before positive (negative) announcements; and (3) insider purchases are more profitable before unscheduled announcements than before scheduled ones. They suggest that insiders time their trades around scheduled and unscheduled announcements to exploit the varying extent of liquidity trading.

Do Corporate Managers Trade Against Short Sellers?

Motivated by the significant capital allocated to repurchasing stock and its potential affect on price discovery, we develop an empirical model of changes in corporate stock repurchases. We find that share price, capital availability, dividend policy, firm size, and operating profitability significantly influence quarterly stock repurchases, but our novel discovery is that managers trade against shorts by increasing (decreasing) repurchases in response to an increase (decrease) in short sales. This practice appears to violate SEC regulations that stock price be set by “independent market forces without undue influence by the issuer.” We also empirically model insider trading, finding that insiders buy and sell with the shorts, with little attention to the amount of shares being repurchased. Managers therefore trade with shorts when using their personal capital, but against them with corporate capital.

The effect of cross-listing on insider trading returns

Holding privileged positions within firms, insiders can acquire excessive private benefits based on their informational advantage. The bonding hypothesis suggests that this can be prevented when a firm is cross-listed on an exchange with higher regulatory and legal costs compared with its home exchange. When cross-listed insiders buy and sell shares, the returns earned are lower than in domestic firms. This difference is attributable to the increased shareholder protection in cross-listed firms that constrains the extraction of private benefits, such that when cross-listed insiders trade, they trade for non-informational reasons.

Why do Corporate Insiders Trade? The UK Evidence

Previous research shows that corporate insiders engage in profitable transactions by trading securities of their own firms around specific events. The objective of this study is to specifically analyse all the events that preceded insider trading transactions and their explicit trading gains. We contrast this hypothesis with the signalling of undervaluation. Using a large sample of UK companies, we test the proposition that corporate insiders time their trades and that the market impact of insiders' transactions varies based on the information on which they trade on. We find that (i) insiders buy (sell) shares prior to stock price decline (run up), (ii) the event date abnormal returns are positive for buy and negative for sell transactions, (iii) the post-event abnormal returns following [+1, +10] buy (sell) trades are positive (negative), suggesting that insiders convey information to the market and that other investors follow these trades, (iv) in the longer term [+2, +160] companies do not seem to regain their pre-trade valuation, (v) the pre- and post-event abnormal performance depends on the news that precedes the trades. Overall, our results suggest that insiders time their trades and they are capable to better assess the value of their firm. Outsiders, aware of that superior view, follow insiders' behaviour in the short-term and fortify the exceptional returns gained by directors. We also find evidence that insiders use this signalling effect to sometimes camouflage their trades and overcome regulators' monitoring.

An investigation of causality between insider transactions and stock returns

Prior research shows that corporate insiders engage in profitable transactions by trading securities of their own firms. The main purpose of this study is to examine whether insider transactions and stock returns have causality relationships at the firm level for a sample of 2,521 firms during the period 1988 to 1998. We find a large impact of stock returns on subsequent insider transactions at both the aggregate and firm levels. The impact appears to be negative which suggests that insiders buy after stock price decreases and sell after stock price increases. Our findings on the predictive content of insider transactions for subsequent stock returns are primarily consistent with prior literature. We observe a positive but weak relationship between insider transactions and future stock returns.

Public Disclosure of Insider Trades, Trading Costs, and Price Discovery

The trading decisions of a rent-seeking corporate insider who possesses long-lived private information are complicated by the regulatory requirement that he publicly disclose his trades after the fact. Such disclosure may allow other market participants to infer the insider's information. Yet the empirical evidence suggests that some corporate insiders buy and sell frequently, and insiders' profits on stock trades are abnormally large. We present a closed form solution for an insider's equilibrium stock trading strategy in a multiperiod rational expectations framework. The insider uses a mixed strategy to diminish the market maker's ability to infer the insider's private information. Relative to the benchmark established by Kyle (1985), we find that disclosure accelerates price discovery, and, in contrast to earlier models by Fishman and Hagerty (1995) and John and Narayanan (1997), mandatory disclosure unambiguously reduces insider profits. Regulatory implications are considered.