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Insider Trading and Long-Run Return Performance

Author

Listed:
  • R. Richardson Pettit
  • P.C. Venkatesh

Abstract

This paper investigates the relation between security performance and the propensity for trading by "manager" insiders. The primary empirical model focuses on whether individual firms' abnormal standardized levels of insider purchases and sales are related to past, current, and future security performance. To overcome the inherent problem of identifying insider activity in proximity to material events, when insiders may face significant costs of detection on some types of transactions, our study considers firm performance over long-run (3-year) intervals. Moreover, by analyzing all NYSE and AMEX firms, we are able to characterize the propensity, probability, and profitability of insider trading in equity markets in general. Our results show a strong tendency for insider net purchases to be significantly above and below normal between one and two years in advance of long horizon returns (both market-related and firm-specific) that are above and below normal, respectively. Subsequent to abnormal returns, insiders tend to reverse their trades. Thus, insider transactions have both a long-term anticipatory and a reactive components to them. Virtually all of our results are driven by the timing of the insider sales, rather than purchases.

Suggested Citation

  • R. Richardson Pettit & P.C. Venkatesh, 1995. "Insider Trading and Long-Run Return Performance," Financial Management, Financial Management Association, vol. 24(2), Summer.
    • Handle: RePEc:fma:fmanag:pettit95
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    Citations

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    Cited by:

    1. Michael Buchner & Tobias A. Jopp, 2019. "Full steam ahead: Insider knowledge, stock trading and the nationalization of the railways in Prussia around 1879," Working Papers 0151, European Historical Economics Society (EHES).
    2. Taylor Smith & Walter E. Block, 2016. "The Economics of Insider Trading: A Free Market Perspective," Journal of Business Ethics, Springer, vol. 139(1), pages 47-53, November.
    3. Hossain, Md Mosharraf & Heaney, Richard & Yu, Jing, 2020. "The information content of director trading: Evidence from acquisition announcements in Australia," Global Finance Journal, Elsevier, vol. 44(C).
    4. Alan Gregory & Rajesh Tharyan & Ian Tonks, 2013. "More than Just Contrarians: Insider Trading in Glamour and Value Firms," European Financial Management, European Financial Management Association, vol. 19(4), pages 747-774, September.
    5. Michael R. King, 2009. "Prebid Run‐Ups Ahead of Canadian Takeovers: How Big Is the Problem?," Financial Management, Financial Management Association International, vol. 38(4), pages 699-726, December.
    6. Sinan Gokkaya & Michael J. Highfield, 2014. "Sales of Secondary Shares in SEOs: A Comparison across Top Managers, Other Insiders, and Outsiders," Financial Management, Financial Management Association International, vol. 43(4), pages 757-794, December.
    7. Hillier, David & Marshall, Andrew, 2002. "Insider trading, tax-loss selling, and the turn-of-the-year effect," International Review of Financial Analysis, Elsevier, vol. 11(1), pages 73-84.
    8. Kahle, Kathleen M., 2000. "Insider trading and the long-run performance of new security issues," Journal of Corporate Finance, Elsevier, vol. 6(1), pages 25-53, March.
    9. Partha Gangopadhyay & Ken Yook & Yoon Shin, 2014. "Insider trading and firm-specific return volatility," Review of Quantitative Finance and Accounting, Springer, vol. 43(1), pages 1-19, July.
    10. repec:dgr:rugsom:01e49 is not listed on IDEAS
    11. Mariia Bondarenko & Karel Brůna, 2021. "The Impact of FX Exposure on the Firm's Stock Market Return," European Financial and Accounting Journal, Prague University of Economics and Business, vol. 2021(1), pages 45-70.
    12. Scholtens, Bert & Snijder, Elke, 2001. "Are internet firms different? : evidence from insider trading," Research Report 01E49, University of Groningen, Research Institute SOM (Systems, Organisations and Management).

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