Insider Trading





Kerry Back and Kevin Crotty

Insider Trading

  • A large academic and practitioner literature shows that some trades by company insiders contain information about future returns.

  • Quandl’s Core US Insiders Data (SHARADAR/SF2) can be used to explore these strategies

Cohen, Malloy, Pomorski (JF 2012)

  • Separate routine from opportunistic insider trades

  • Routine traders are those trading in same month each year for 3 years

  • Opportunistic insider trades have more information content (esp. nonexecutive insiders from geographically concentrated, poorly governed firms)

  • A value-weighted portfolio focusing on opportunistic trades returns 82 bps per month

  • Cohen, Malloy, Pomorski (JF 2012)

Akbas, Jiang, and Koch (JF 2020)

  • Short-horizon (SH) insiders make both more unexpected and more informed trades than those of long-horizon (LH) insiders.

  • Investment horizon: absolute value of average annual net order flow in insider’s own-company stock over past 10 years

    • close to 0: insider sometimes buys and sometimes sells
    • close to 1: insider is usually buying or selling (not both)

Akbas, Jiang, and Koch (JF 2020)

  • Long-short strategy of recent strong purchases and sales of SH insiders: 2.08% abnormal monthly return

  • Long-short strategy of recent strong purchases and sales of LH insiders: 0.77% per month

  • Akbas, Jiang, and Koch (JF 2020)

CMP vs AJK

  • CMP focuses on unexpectedness in trade timing

  • AJK focuses on unexpectedness in trade direction

  • AJK also takes trading strength into account

  • Trading strength = net insider purchases scaled by trading volume

    • then take scaled rank in the cross-section of insiders