IDEAS home Printed from https://ideas.repec.org/a/eee/revfin/v21y2012i4p159-167.html
   My bibliography  Save this article

A logit model of retail investors' individual trading decisions and their relations to insider trades

Author

Listed:
  • Stotz, Olaf
  • Georgi, Dominik

Abstract

Among the various external information sources that influence individual investors' trading decisions, no research has considered the important influence of insiders' transactions. Retail investors might copy the behavior demonstrated by insiders' trading; therefore, this study establishes an approach to estimate the buying probability for a certain stock by a certain investor at a certain point in time and analyzes whether insider trade reports influence this probability. Using a sample of more than 270,000 retail trades in Germany between 2008 and 2009, along with more than 3000 insider trades in the same period, we find evidence of copying of insiders' trades by retail investors. The basic mimicry hypothesis holds, even when we consider an information event hypothesis and an insider attention effect hypothesis as alternative explanations. A robustness test also supports the findings.

Suggested Citation

  • Stotz, Olaf & Georgi, Dominik, 2012. "A logit model of retail investors' individual trading decisions and their relations to insider trades," Review of Financial Economics, Elsevier, vol. 21(4), pages 159-167.
  • Handle: RePEc:eee:revfin:v:21:y:2012:i:4:p:159-167
    DOI: 10.1016/j.rfe.2012.04.001
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1058330012000250
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    2. Sirnes, Espen, 2011. "Why falling information costs may increase demand for index funds," Review of Financial Economics, Elsevier, vol. 20(1), pages 37-47, January.
    3. Darrat, Ali F. & Zhong, Maosen & Cheng, Louis T.W., 2007. "Intraday volume and volatility relations with and without public news," Journal of Banking & Finance, Elsevier, vol. 31(9), pages 2711-2729, September.
    4. Seyhun, H. Nejat, 1986. "Insiders' profits, costs of trading, and market efficiency," Journal of Financial Economics, Elsevier, vol. 16(2), pages 189-212, June.
    5. Jiang, Xiaoquan & Zaman, Mir A., 2010. "Aggregate insider trading: Contrarian beliefs or superior information?," Journal of Banking & Finance, Elsevier, vol. 34(6), pages 1225-1236, June.
    6. Mariassunta Giannetti & Andrei Simonov, 2006. "Which Investors Fear Expropriation? Evidence from Investors' Portfolio Choices," Journal of Finance, American Finance Association, vol. 61(3), pages 1507-1547, June.
    7. Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    8. Brad M. Barber & Terrance Odean, 2000. "Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors," Journal of Finance, American Finance Association, vol. 55(2), pages 773-806, April.
    9. Busse, Jeffrey A. & Clifton Green, T., 2002. "Market efficiency in real time," Journal of Financial Economics, Elsevier, vol. 65(3), pages 415-437, September.
    10. Olaf Stotz, 2012. "Do Retail Investors Follow Insider Trades?," German Economic Review, Verein für Socialpolitik, vol. 13(3), pages 257-274, August.
    11. Ma, Yulong & Sun, Huey-Lian & Tang, Alex P., 2009. "Do insiders have inside tracks: An examination of Wall Street Journal's Inside Track columns?," International Review of Economics & Finance, Elsevier, vol. 18(3), pages 520-530, June.
    12. Brad M. Barber & Terrance Odean, 2001. "Boys will be Boys: Gender, Overconfidence, and Common Stock Investment," The Quarterly Journal of Economics, Oxford University Press, vol. 116(1), pages 261-292.
    13. George M Korniotis & Alok Kumar, 2011. "Do Older Investors Make Better Investment Decisions?," The Review of Economics and Statistics, MIT Press, vol. 93(1), pages 244-265, February.
    14. Terrance Odean, 1998. "Are Investors Reluctant to Realize Their Losses?," Journal of Finance, American Finance Association, vol. 53(5), pages 1775-1798, October.
    15. Brad M. Barber & Terrance Odean, 2008. "All That Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors," Review of Financial Studies, Society for Financial Studies, vol. 21(2), pages 785-818, April.
    16. Lakonishok, Josef & Lee, Inmoo, 2001. "Are Insider Trades Informative?," Review of Financial Studies, Society for Financial Studies, vol. 14(1), pages 79-111.
    17. Leslie A. Jeng & Andrew Metrick & Richard Zeckhauser, 2003. "Estimating the Returns to Insider Trading: A Performance-Evaluation Perspective," The Review of Economics and Statistics, MIT Press, vol. 85(2), pages 453-471, May.
    18. Estrella, Arturo, 1998. "A New Measure of Fit for Equations with Dichotomous Dependent Variables," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(2), pages 198-205, April.
    19. Ke, Bin & Huddart, Steven & Petroni, Kathy, 2003. "What insiders know about future earnings and how they use it: Evidence from insider trades," Journal of Accounting and Economics, Elsevier, vol. 35(3), pages 315-346, August.
    20. Seyhun, H Nejat, 1990. "Do Bidder Managers Knowingly Pay Too Much for Target Firms?," The Journal of Business, University of Chicago Press, vol. 63(4), pages 439-464, October.
    21. Olaf Stotz, 2006. "Germany's New Insider Law: The Empirical Evidence after the First Year," German Economic Review, Verein für Socialpolitik, vol. 7, pages 449-462, November.
    22. Joao F. Cocco, 2005. "Consumption and Portfolio Choice over the Life Cycle," Review of Financial Studies, Society for Financial Studies, vol. 18(2), pages 491-533.
    23. Piotroski, Joseph D. & Roulstone, Darren T., 2005. "Do insider trades reflect both contrarian beliefs and superior knowledge about future cash flow realizations?," Journal of Accounting and Economics, Elsevier, vol. 39(1), pages 55-81, February.
    24. Kallunki, Juha-Pekka & Nilsson, Henrik & Hellström, Jörgen, 2009. "Why do insiders trade? Evidence based on unique data on Swedish insiders," Journal of Accounting and Economics, Elsevier, vol. 48(1), pages 37-53, October.
    25. Lee, D Scott & Mikkelson, Wayne H & Partch, M Megan, 1992. " Managers' Trading around Stock Repurchases," Journal of Finance, American Finance Association, vol. 47(5), pages 1947-1961, December.
    26. Michael S. Rozeff & Mir A. Zaman, 1998. "Overreaction and Insider Trading: Evidence from Growth and Value Portfolios," Journal of Finance, American Finance Association, vol. 53(2), pages 701-716, April.
    27. Drakos, Konstantinos, 2010. "Terrorism activity, investor sentiment, and stock returns," Review of Financial Economics, Elsevier, vol. 19(3), pages 128-135, August.
    28. Jegadeesh, Narasimhan & Titman, Sheridan, 1993. " Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency," Journal of Finance, American Finance Association, vol. 48(1), pages 65-91, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. André Schmidt, 2017. "Determinants of Corporate Voting – Evidence from a Large Survey of German Retail Investors," Schmalenbach Business Review, Springer;Schmalenbach-Gesellschaft, vol. 18(1), pages 71-103, February.

    More about this item

    Keywords

    Insider investors; Retail investors; Trading decisions;

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:revfin:v:21:y:2012:i:4:p:159-167. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu). General contact details of provider: http://www.elsevier.com/locate/inca/620170 .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.