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Decoding Inside Information

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  • Lauren Cohen
  • Christopher Malloy
  • Lukasz Pomorski

Abstract

Using a simple empirical strategy, we decode the information in insider trades. Exploiting the fact that insiders trade for a variety of reasons, we show that there is predictable, identifiable "routine" insider trading that is not informative for the future of firms. Stripping away these routine trades, which comprise over half the entire universe of insider trades, leaves a set of information-rich "opportunistic" trades that contains all the predictive power in the insider trading universe. A portfolio strategy that focuses solely on opportunistic insider trades yields value-weight abnormal returns of 82 basis points per month, while the abnormal returns associated with routine traders are essentially zero. Further, opportunistic trades predict future news and events at a firm level, while routine trades do not.

Suggested Citation

  • Lauren Cohen & Christopher Malloy & Lukasz Pomorski, 2010. "Decoding Inside Information," NBER Working Papers 16454, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:16454
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    References listed on IDEAS

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    1. Jaffe, Jeffrey F, 1974. "Special Information and Insider Trading," The Journal of Business, University of Chicago Press, vol. 47(3), pages 410-428, July.
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    7. Rozeff, Michael S & Zaman, Mir A, 1988. "Market Efficiency and Insider Trading: New Evidence," The Journal of Business, University of Chicago Press, vol. 61(1), pages 25-44, January.
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    10. 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.
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    Cited by:

    1. Peter Koudijs, 2013. "'Those Who Know Most': Insider Trading in 18th c. Amsterdam," NBER Working Papers 18845, National Bureau of Economic Research, Inc.

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    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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