Decoding Inside Information

By Lauren Cohen, Christopher J. Malloy, Lukasz Pomorski. 2012

617 citations recorded by the source corpus.

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.

Subfields: Accounting, Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/f2544e167eaecae38915e4a734f0b114444192dc

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Citations in the corpus

Do Short Sellers Front-Run Insider Sales? (2013, positive): “We interpret this result as suggesting that the average front-runner does not appear to be aware of the opportunistic versus routine distinction as identified by the Cohen et al. (2012) algorithm.”
Opportunism as a Firm and Managerial Trait: Predicting Insider Trading Profits and Misconduct (2017, methodology): “This table compares the performance of our insider classification with the routine and nonroutine insider classification of Cohen et al. (2012 ).”
SEC Comment Letters and Insider Sales (2016, neutral): “For example, Cohen et al. (2012) find negative returns of 63 basis points in the 30 days”
The role of the media in disseminating insider-trading news (2016, positive): “There is a large literature on the profitability of insider trading for insiders as well as whether outsiders can profit from public information about these trades (these are tests of strong form and semi-strong form efficiency, respectively; see Lorie and Niederhoffer 1968; Finnerty 1976; Seyhun 19”
Competition of the Informed: Does the Presence of Short Sellers Affect Insider Selling? (2015, methodology): “We follow Cohen et al. (2012) and identify information-driven insider trades based on a “routine” and “opportunistic” classification.”
Corporate governance and the profitability of insider trading (2016, neutral): “11 ISS also covers the firms that are required to file various documents and forms with the SEC through the Electronic Data Gathering, Analysis, and Retrieval system (EDGAR).”
Big Data as a Governance Mechanism (2019, positive): “constraints and litigation risk on sales rather than buys (e.g., Section 16c of the US Securities Exchange Act of 1924; Marin and Olivier 2008; Cohen et al. 2012).”