Get 20M+ Full-Text Papers For Less Than $1.50/day. Start a 14-Day Trial for You or Your Team.

Learn More →

An empirical analysis of corporate insiders' trading performance

An empirical analysis of corporate insiders' trading performance Purpose – The purpose of this paper is to conduct an empirical analysis of the trading performance of US corporate insiders. Design/methodology/approach – Based on the volume weighted average price (VWAP), the authors propose a metric to measure the trading performance of US corporate insiders: trading alpha. This metric is clean of the contamination effect from insiders' own trades. The authors apply this metric to examine whether insiders can beat the market when they trade. Findings – It is found that corporate insiders achieve positive trading alpha on both purchases and sales of stocks on average. The existence of a positive trading alpha is robust to controlling for firm, trading and insider characteristics. More importantly, evidence is found for the persistence in corporate insiders' trading performance. Those insiders who traded well in the past continue to trade well over time. Those who well execute in purchases of stocks also perform well in sales. Originality/value – This paper extends the notion of beating the market from the investment profession to the trading profession. Skyrocketing corporate insider trades provide a natural setting under which to examine the trading performance. The findings that: insiders can beat the market on average when they trade; and there exists persistence in the insiders' trading performance over time and along trading directions are novel and new to the literature. This paper also has bearing on how to evaluate professional traders. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png China Finance Review International Emerald Publishing

An empirical analysis of corporate insiders' trading performance

Qin Lei; Murli Rajan; Xuewu Wang
China Finance Review International , Volume 2 (3): 19 – Jun 8, 2012
Download PDF
19 pages

Loading next page...
 
/lp/emerald-publishing/an-empirical-analysis-of-corporate-insiders-trading-performance-eyfTbW03NH
Publisher
Emerald Publishing
Copyright
Copyright © 2012 Emerald Group Publishing Limited. All rights reserved.
ISSN
2044-1398
DOI
10.1108/20441391211231033
Publisher site
See Article on Publisher Site

Abstract

Purpose – The purpose of this paper is to conduct an empirical analysis of the trading performance of US corporate insiders. Design/methodology/approach – Based on the volume weighted average price (VWAP), the authors propose a metric to measure the trading performance of US corporate insiders: trading alpha. This metric is clean of the contamination effect from insiders' own trades. The authors apply this metric to examine whether insiders can beat the market when they trade. Findings – It is found that corporate insiders achieve positive trading alpha on both purchases and sales of stocks on average. The existence of a positive trading alpha is robust to controlling for firm, trading and insider characteristics. More importantly, evidence is found for the persistence in corporate insiders' trading performance. Those insiders who traded well in the past continue to trade well over time. Those who well execute in purchases of stocks also perform well in sales. Originality/value – This paper extends the notion of beating the market from the investment profession to the trading profession. Skyrocketing corporate insider trades provide a natural setting under which to examine the trading performance. The findings that: insiders can beat the market on average when they trade; and there exists persistence in the insiders' trading performance over time and along trading directions are novel and new to the literature. This paper also has bearing on how to evaluate professional traders.

Journal

China Finance Review International – Emerald Publishing

Published: Jun 8, 2012

Keywords: United States of America; Insider trading; Stocks and shares; Portfolio investment; Insider trades; Volume weighted average price; Trading alpha; Performance persistence

References

  • Informational role of insider trading
    Ahmet, C.; Biao, L.; Seyhun, H.N.
  • Illiquidity and stock returns: cross‐section and time‐series effects
    Amihud, Y.
  • Performance of institutional trading desks: an analysis of persistence in trading cost
    Anand, A.; Paul, I.; Andy, P.; Kumar, V.
  • The measurement and control of trading costs
    Arnott, R.D.; Wagner, W.H.
  • The tricks of the trade
    Beebower, G.; Priest, W.
  • The total cost of transactions on the NYSE
    Berkowitz, S.A.; Dennis, E.L.; Eugene, A.N.
  • Short‐term persistence in mutual fund performance
    Bollen, N.P.B.; Busse, J.A.
  • On persistence in mutual fund performance
    Carhart, M.M.
  • The behavior of stock prices around institutional trades
    Chan, L.K.C.; Lakonishok, J.
  • A methodology for measuring transaction costs
    Collins, B.M.; Fabozzi, F.J.
  • Institutional trading and alternative trading systems
    Conrad, J.; Kevin, M.J.; Sunil, W.
  • Institutional trading and soft dollars
    Conrad, J.S.; Kevin, M.J.; Sunil, W.
  • Measuring mutual fund performance with characteristic‐based benchmarks
    Daniel, K.; Mark, G.; Sheridan, T.; Russ, W.
  • VWAP cost excluding own trades
    Hu, G.
  • Measures of implicit trading costs and buy‐sell asymmetry
    Hu, G.
  • Estimating the returns to insider trading: a performance‐evaluation perspective
    Jeng, L.A.; Andrew, M.; Richard, Z.
  • Anatomy of the trading process empirical evidence on the behavior of institutional traders
    Keim, D.B.; Ananth, M.
  • Transactions costs and investment style: an inter‐exchange analysis of institutional equity trades
    Keim, D.B.; Madhavan, A.
  • The cost of institutional equity trades
    Keim, D.B.; Madhavan, A.
  • Inferring trade direction from intraday data
    Lee, C.M.C.; Ready, M.J.
  • VWAP strategies
    Madhavan, A.
  • The implementation shortfall: paper versus reality
    Perold, A.F.
  • The challenge of institutionalization for the equity markets
    Schwartz, R.A.; Shapiro, J.
  • Automated versus floor trading: an analysis of execution costs on the Paris and New York exchanges
    Venkataraman, K.
  • Mutual fund performance: an empirical decomposition into stock‐picking talent, style, transactions costs, and expenses
    Wermers, R.