Session 23: Information Trading - Following the insiders

In this session, we look at a strategy of following the insiders in a company, buying when they are buying and selling when they are, on the assumption that insiders know more about a company’s value than market participants. To evaluate whether this strategy works, we first look at whether insider trading is a good predictor of stock returns in subsequent time periods. While we do find that insider buying (selling) is followed by positive (negative) market returns, we also find that the signal is often wrong and that timely access to the insider trading information is critical. We also find insider trading is more predictive, if top executives are involved and at smaller companies. Finally, we conclude that we would generate far more lucrative payoffs if we had access to illegal insider trading information.