Faculty Publications

Title

Aggregate insider trading: Contrarian beliefs or superior information?

Document Type

Article

Keywords

Cash-flow news, Contrarian investment strategy, Discount rate news, Insider trading, Return decomposition

Journal/Book/Conference Title

Journal of Banking and Finance

Volume

34

Issue

6

First Page

1225

Last Page

1236

Abstract

We decompose realized market returns into expected return, unexpected cash-flow news and unexpected discount rate news to test the relation between aggregate market returns and aggregate insider trading. We find that (1) the predictive ability of aggregate insider trading is much stronger than what was reported in earlier studies, (2) aggregate insider trading is strongly related to unexpected cash-flow news, (3) market expectations do not cause insider trading contrary to what others have documented, and (4) aggregate insider trading in firms with high information uncertainty is more likely to be associated with contrarian investment strategy. These results strongly suggest that the predictive ability of aggregate insider trading is because of insider's ability to predict future cash-flow news rather than from adopting a contrarian investment strategy. These results hold even after we control for non-informative trades and information uncertainty. © 2009 Elsevier B.V. All rights reserved.

Original Publication Date

6-1-2010

DOI of published version

10.1016/j.jbankfin.2009.11.016

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