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Decoding Inside Information
Author(s) -
COHEN LAUREN,
MALLOY CHRISTOPHER,
POMORSKI LUKASZ
Publication year - 2012
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2012.01740.x
Subject(s) - enforcement , portfolio , futures contract , insider trading , business , insider , inside information , value (mathematics) , variety (cybernetics) , financial economics , basis point , trading strategy , economics , finance , computer science , law , mathematics , artificial intelligence , statistics , political science , interest rate
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 about firms’ futures. A portfolio strategy that focuses solely on the remaining “opportunistic” traders yields value‐weighted abnormal returns of 82 basis points per month, while abnormal returns associated with routine traders are essentially zero. The most informed opportunistic traders are local, nonexecutive insiders from geographically concentrated, poorly governed firms. Opportunistic traders are significantly more likely to have SEC enforcement action taken against them, and reduce trading following waves of SEC insider trading enforcement.