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Return Synchronicity and Insider Trading Profitability *
Author(s) -
Liang Claire Y.C.,
Tang Zhenyang,
Xu Xiaowei
Publication year - 2020
Publication title -
international review of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.489
H-Index - 18
eISSN - 1468-2443
pISSN - 1369-412X
DOI - 10.1111/irfi.12246
Subject(s) - synchronicity , profitability index , insider , insider trading , business , earnings , stock (firearms) , abnormal return , monetary economics , financial economics , economics , accounting , finance , stock exchange , political science , law , mechanical engineering , philosophy , epistemology , engineering
We investigate the association between stock return synchronicity and insider trading profitability. Morck, Yeung and Yu (2000) suggest that greater stock return synchronicity (or R 2 ) reflects less firm‐specific information in stock prices. Consistent with the view, we find significantly higher insider profitability in firms with greater return synchronicity. The results mainly reside in opportunistic trades rather than in routine trades, and are more pronounced for trades by key insiders such as officers and directors. Furthermore, our results are weaker for industry bellwether firms, and stronger for firms with more opaque earnings or lower institutional ownership. We also document significantly more insider purchasing activity in firms with greater return synchronicity. Overall, our results support the view that greater return synchronicity means less firm‐specific information in stock prices, and suggest that insiders take advantage of this by trading and profiting more from firms with greater return synchronicity.