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Decoding Inside Information

  • Lauren Cohen
  • Christopher Malloy
  • Lukasz Pomorski
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    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.

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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16454.

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    Date of creation: Oct 2010
    Date of revision:
    Publication status: published as “Decoding Inside Info rmation” (with Christop her Malloy and Lukasz Pomorski), 2012. Journal of Finance 67, 1009-1044.
    Handle: RePEc:nbr:nberwo:16454
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    1. Bettis, J. C. & Coles, J. L. & Lemmon, M. L., 2000. "Corporate policies restricting trading by insiders," Journal of Financial Economics, Elsevier, vol. 57(2), pages 191-220, August.
    2. 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.
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