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Insider Trades and Demand by Institutional and Individual Investors

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  • Richard W. Sias

Abstract

There is a strong inverse relation between insider trading and institutional demand the same quarter and over the previous year. Our analysis suggests a combination of factors contribute to this relation. First, institutional investors are more likely to provide the liquidity necessary for insiders to trade. Second, insiders are more likely to buy low valuation and low lag return stocks while institutions are attracted to the opposite security characteristics. Last, the results are consistent with the hypothesis that insiders are more likely to view their securities as overvalued (undervalued) following a period when institutions were net buyers (sellers). The Author 2010. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.

Suggested Citation

  • Richard W. Sias, 2010. "Insider Trades and Demand by Institutional and Individual Investors," The Review of Financial Studies, Society for Financial Studies, vol. 23(4), pages 1544-1595, April.
    • Handle: RePEc:oup:rfinst:v:23:y:2010:i:4:p:1544-1595
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    Cited by:

    1. George P. Gao & Qingzhong Ma & David T. Ng & Ying Wu, 2022. "The Sound of Silence: What Do We Know When Insiders Do Not Trade?," Management Science, INFORMS, vol. 68(7), pages 4835-4857, July.
    2. Zhou, Deqing & Wang, Wenjie, 2020. "Insider, outsider and information heterogeneity," The North American Journal of Economics and Finance, Elsevier, vol. 53(C).
    3. William J. McNally & Andriy Shkilko & Brian F. Smith, 2017. "Do Brokers of Insiders Tip Other Clients?," Management Science, INFORMS, vol. 63(2), pages 317-332, February.
    4. Chen, Huaizhi & Cohen, Lauren & Gurun, Umit & Lou, Dong & Malloy, Christopher, 2020. "IQ from IP: Simplifying search in portfolio choice," Journal of Financial Economics, Elsevier, vol. 138(1), pages 118-137.
    5. Wang, Hailong & Hu, Duni, 2021. "Heterogeneous beliefs with herding behaviors and asset pricing in two goods world," The North American Journal of Economics and Finance, Elsevier, vol. 57(C).
    6. Ma, Qingzhong & Whidbee, David A. & Zhang, Wei, 2019. "Acquirer reference prices and acquisition performance," Journal of Financial Economics, Elsevier, vol. 132(1), pages 175-199.
    7. Guanming He, 2023. "How do insider trading incentives shape nonfinancial disclosures? Evidence from product and business expansion disclosures," Review of Quantitative Finance and Accounting, Springer, vol. 60(1), pages 147-194, January.
    8. Ruey-Dang Chang & Jo-Ting Wei, 2011. "Effects of governance on investment decisions and perceptions of reporting credibility: Investment experience of Taiwanese individual investors," Asia Pacific Journal of Management, Springer, vol. 28(1), pages 139-155, March.
    9. Lin, Chih-Yung & Ho, Po-Hsin & Shen, Chung-Hua & Wang, Yu-Chun, 2016. "Political connection, government policy, and investor trading: Evidence from an emerging market," International Review of Economics & Finance, Elsevier, vol. 42(C), pages 153-166.
    10. DeLisle, R. Jared & Morscheck, Justin D. & Nofsinger, John R., 2020. "Share repurchases and wealth transfer among shareholders," The Quarterly Review of Economics and Finance, Elsevier, vol. 76(C), pages 368-378.
    11. Raffi Indjejikian & Hai Lu & Liyan Yang, 2014. "Rational Information Leakage," Management Science, INFORMS, vol. 60(11), pages 2762-2775, November.
    12. Chen, Shenglan & Ma, Hui & Wu, Qiang & Zhang, Hao, 2023. "Does common ownership constrain managerial rent extraction? Evidence from insider trading profitability," Journal of Corporate Finance, Elsevier, vol. 80(C).
    13. Tim V. Eaton & John R. Nofsinger & Abhishek Varma, 2014. "Institutional Investor Ownership and Corporate Pension Transparency," Financial Management, Financial Management Association International, vol. 43(3), pages 603-630, September.
    14. Chung, Chune Young & DeVault, Luke & Wang, Kainan, 2019. "Perceived information, short interest, and institutional demand," Journal of Empirical Finance, Elsevier, vol. 54(C), pages 22-38.
    15. Neupane, Biwesh & Thapa, Chandra & Marshall, Andrew & Neupane, Suman, 2021. "Mimicking insider trades," Journal of Corporate Finance, Elsevier, vol. 68(C).
    16. Shen, Chung-Hua & Lin, Chih-Yung, 2015. "Betting on presidential elections: Should we buy stocks connected with the winning party?," The Quarterly Review of Economics and Finance, Elsevier, vol. 56(C), pages 98-109.
    17. Ashiq Ali & Kelsey D. Wei & Yibin Zhou, 2011. "Insider Trading and Option Grant Timing in Response to Fire Sales (and Purchases) of Stocks by Mutual Funds," Journal of Accounting Research, Wiley Blackwell, vol. 49(3), pages 595-632, June.
    18. Richard Sias & H. J. Turtle & Blerina Zykaj, 2016. "Hedge Fund Crowds and Mispricing," Management Science, INFORMS, vol. 62(3), pages 764-784, March.
    19. Nickolay Gantchev & Chotibhak Jotikasthira, 2018. "Institutional Trading and Hedge Fund Activism," Management Science, INFORMS, vol. 64(6), pages 2930-2950, June.
    20. Hoang Luong Luong & Huong Giang (Lily) Nguyen & Xiangkang Yin, 2015. "When Is a Firm's Information Asymmetry Priced? The Role of Institutional Investors," International Review of Finance, International Review of Finance Ltd., vol. 15(1), pages 55-88, March.
    21. Jiyoon Lee, 2021. "Information Asymmetry, Mispricing, and Security Issuance," Journal of Finance, American Finance Association, vol. 76(6), pages 3401-3446, December.
    22. Jared DeLisle, R. & Morscheck, J.D. & Nofsinger, John R., 2014. "Share repurchases and institutional supply," Journal of Corporate Finance, Elsevier, vol. 27(C), pages 216-230.
    23. Massa, Massimo & Qian, Wenlan & Xu, Weibiao & Zhang, Hong, 2015. "Competition of the informed: Does the presence of short sellers affect insider selling?," Journal of Financial Economics, Elsevier, vol. 118(2), pages 268-288.
    24. Lauren Cohen & Christopher Malloy & Lukasz Pomorski, 2012. "Decoding Inside Information," Journal of Finance, American Finance Association, vol. 67(3), pages 1009-1043, June.
    25. Hoang, Lai T. & Wee, Marvin & Yang, Joey Wenling, 2023. "Strategic trading by insiders in the presence of institutional investors," Journal of Financial Markets, Elsevier, vol. 64(C).

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