Hostname: page-component-76fb5796d-r6qrq Total loading time: 0 Render date: 2024-04-27T15:24:26.206Z Has data issue: false hasContentIssue false
  • English
  • Français

Indirect Insider Trading

Published online by Cambridge University Press:  11 October 2022

Brad Goldie ,
Chao Jiang ,
Paul Koch Open the ORCID record for Paul Koch [Opens in a new window]  and
M. Babajide Wintoki
Brad Goldie
Affiliation:
Miami University Farmer School of Business goldieba@miamioh.edu
Chao Jiang
Affiliation:
University of South Carolina Darla Moore School of Business chao.jiang@moore.sc.edu
Paul Koch*
Affiliation:
Iowa State University Ivy College of Business
M. Babajide Wintoki
Affiliation:
University of Kansas School of Business jwintoki@ku.edu
*
pkoch@iastate.edu (corresponding author)
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

Insiders must disclose indirect trades made through accounts they control, including family, trust, retirement, and foundation accounts. Indirect trades through these accounts are more profitable than direct trades in the insider’s own account. They are also more likely to be made by “opportunistic” insiders who make nonroutine trades, or who trade profitably before earnings announcements, or who have a short investment horizon. These trades contain more predictive information about earnings surprises and large price changes, and they tend to be made by insiders at firms with high information asymmetry. Insiders also make fewer indirect trades following periods of intense regulatory scrutiny.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 58 , Issue 6 , September 2023 , pp. 2327 - 2364
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (https://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We acknowledge the helpful comments of Anup Agrawal (the referee), Kenneth Ahern, Ferhat Akbas, Lezgin Ay, Jamie Brown, Ruiyuan Chen, Shijun Cheng, Gjergji Cici, Matthew Denes, Bob DeYoung, Truong Duong, Laura Field, Claire Yurong Hong, Tyler Jensen, Bin Ke, Hugh Kim, April Knill, Weikai Li, Marshall Xiaoyin Ma, Paul Malatesta (the editor), Felix Meschke, Rodney Ndum, Greg Niehaus, Kevin Pisciotta, Mark Power, Travis Sapp, Christoph Schneider, Xiaolu Wang, Hong Yan, Xiangyi Zhou, and seminar participants at Florida State University, Iowa State University, Shanghai Jiao Tong University (SAIF), the University of Kansas, the University of North Carolina at Charlotte, West Virginia University, Xi’an Jiao Tong University (Jinhe), the 2019 Southern Finance Association Meetings, the 2019 Conference on Intelligent Information Retrieval in Accounting and Finance, the 2019 China International Conference in Finance, the 2018 SFS Cavalcade-Asia Conference, and the 2019 Western Finance Association meetings. Special thanks go to Henk Berkman for his valuable input. Any errors are our own.

References

Aboody, D., and Lev, B.. “Information Asymmetry, R&D and Insider Gains.” Journal of Finance, 55 (2000), 2747–2766.Google Scholar
Adhikari, B. K.; Agrawal, A.; and Sharma, B.. “Does Litigation Risk Deter Insider Trading? Evidence from Universal Demand Laws.” Working Paper, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3404720 (2021).Google Scholar
Admati, A. R., and Pfleiderer, P.. “A Theory of Intraday Patterns: Volume and Price Variability.” Review of Financial Studies, 1 (1988), 3–40.Google Scholar
Agrawal, A., and Jaffe, J. F.. “Does Section 16b Deter Insider Trading by Target Managers?” Journal of Financial Economics, 39 (1995), 295–319.Google Scholar
Ahern, K. “Information Networks: Evidence from Illegal Insider Trading Tips.” Journal of Financial Economics, 125 (2017), 26–47.Google Scholar
Ahern, K. “Do Proxies for Informed Trading Measure Informed Trading? Evidence from Illegal Insider Trades.” Review of Asset Pricing Studies, 10 (2020), 397–440.Google Scholar
Akbas, F.; Jiang, C.; and Koch, P. D.. “Insider Investment Horizon.” Journal of Finance, 75 (2020), 1579–1627.Google Scholar
Ali, U., and Hirshleifer, D. A.. “Opportunism as a Managerial Trait: Predicting Insider Trading Profits and Misconduct.” Journal of Financial Economics, 126 (2017), 490–515.Google Scholar
Alldredge, D. M., and Cicero, D. C.. “Attentive Insider Trading.” Journal of Financial Economics, 115 (2015), 84–101.Google Scholar
Amel-Zadeh, A.; Faasse, J.; and Lotz, J.. “Are All Insider Sales Created Equal? First Evidence from Supplementary Disclosures in SEC Filings.” Working Paper, available at https://papers.ssrn.com/sol3/Papers.cfm?abstract_id=2877123 (2019).Google Scholar
Barclay, M. J., and Warner, J. B.. “Stealth Trading and Volatility: Which Trades Move Prices?” Journal of Financial Economics, 34 (1993), 281–305.Google Scholar
Ben-David, I.; Birru, J.; and Rossi, A.. “Industry Familiarity and Trading: Evidence from the Personal Portfolios of Industry Insiders.” Journal of Financial Economics, 132 (2019), 49–75.Google Scholar
Berkman, H.; Koch, P. D.; and Westerholm, P. J.. “Informed Trading Through the Accounts of Children.” Journal of Finance, 69 (2014), 363–404.Google Scholar
Bernard, V. L., and Thomas, J. K.. “Evidence that Stock Prices Do Not Fully Reflect the Implications of Current Earnings for Future Earnings.” Journal of Accounting and Economics, 13 (1990), 305–340.Google Scholar
Bettis, J. C.; Coles, J. L.; and Lemmon, M. L.. “Corporate Policies Restricting Trading by Insiders.” Journal of Financial Economics, 57 (2000), 191–220.Google Scholar
Bhattacharya, U. “Insider Trading Controversies: A Literature Review.” Annual Review of Financial Economics, 6 (2014), 385–403.Google Scholar
Brennan, M. J.; Chordia, T.; and Subrahmanyam, A.. “Alternative Factor Specifications, Security Characteristics, and the Cross-Section of Expected Stock Returns.” Journal of Financial Economics, 49 (1998), 345–373.Google Scholar
Brown, J.; Huston, G. R.; and Wenzel, B. S.. “The Gift That Keeps on Giving: Stock Returns Around CEO Stock Gifts to Family Members.” Working Paper, Arizona State University (2018).Google Scholar
Carhart, M. M. “On Persistence in Mutual Fund Performance.” Journal of Finance, 52 (1997), 57–82.Google Scholar
Chakravarty, S. “Stealth-Trading: Which Traders’ Trades Move Stock Prices?” Journal of Financial Economics, 61 (2001), 289–307.Google Scholar
Cheng, Q., and Lo, K.. “Insider Trading and Voluntary Disclosures.” Journal of Accounting Research, 44 (2006), 815–848.Google Scholar
Cohen, L.; Malloy, C.; and Pomorski, L.. “Decoding Inside Information.” Journal of Finance 67 (2012), 1009–1043.Google Scholar
Coles, J. L.; Daniel, N. D.; and Naveen, L.. “Managerial Incentives and Risk-Taking.” Journal of Financial Economics, 79 (2006), 431–468.Google Scholar
Collin-Dufresne, P., and Fos, V.. “Do Prices Reveal the Presence of Informed Trading?” Journal of Finance, 70 (2015), 1555–1582.Google Scholar
Collin-Dufresne, P., and Fos, V.. “Insider Trading, Stochastic Liquidity, and Equilibrium Prices.” Econometrica, 84 (2016), 1441–1475.Google Scholar
Cornell, B., and Sirri, E. R.. “The Reaction of Investors and Stock Prices to Insider Trading.” Journal of Finance, 47 (1992), 1031–1059.Google Scholar
Cziraki, P.; De Goeij, P.; and Renneboog, L.. “Corporate Governance Rules and Insider Trading Profits.” Review of Finance, 18 (2014), 67–108.Google Scholar
Dambra, M.; Gustafson, M.; and Quinn, P.. “Tax-Advantaged Trust Use Among IPO Executives: Determinants and Implications for Valuation and Future Performance.” Accounting Review, 95 (2020), 145–175.Google Scholar
Del Guercio, D.; Odders-White, E. R.; and Ready, M. J.. “The Deterrence Effect of the Securities and Exchange Commission’s Enforcement Intensity on Illegal Insider Trading: Evidence from Run-Up Before News Events.” Journal of Law and Economics, 60 (2017), 269–307.Google Scholar
Fama, E. F., and French, K. R.. “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics, 33 (1993), 3–56.Google Scholar
Fama, E. F., and French, K. R.. “A Five-Factor Asset Pricing Model.” Journal of Financial Economics, 116 (2015), 1–22.Google Scholar
Fidrmuc, J. P.; Goergen, M.; and Renneboog, L.. “Insider Trading, New Releases and Ownership Concentration.” Journal of Finance, 61 (2006), 2931–2973.Google Scholar
Fishe, R. P. H., and Robe, M. A.. “The Impact of Illegal Insider Trading in Dealer and Specialist Markets: Evidence from a Natural Experiment.” Journal of Financial Economics, 71 (2004), 461–488.Google Scholar
Frankel, R., and Li, X.. “Characteristics of a Firm’s Information Environment and the Information Asymmetry Between Insiders and Outsiders.” Journal of Accounting and Economics, 37 (2004), 229–259.Google Scholar
Garfinkel, J. A., and Nimalendran, M.. “Market Structure and Trader Anonymity: An Analysis of Insider Trading.” Journal of Financial and Quantitative Analysis, 38 (2003), 591–610.Google Scholar
Greene, W. “The Behavior of the Maximum Likelihood Estimator of Limited Dependent Variable Models in the Presence of Fixed Effects.” Econometrics Journal, 7 (2004), 98–119.Google Scholar
Hasbrouck, J. “One Security, Many Markets: Determining the Contributions to Price Discovery.” Journal of Finance, 50 (1995), 1175–1199.Google Scholar
Hong, C. Y., and Li, F. W.. “The Information Content of Sudden Insider Silence.” Journal of Financial and Quantitative Analysis, 54 (2019), 1499–1538.Google Scholar
Huddart, S.; Ke, B.; and Shi, C.. “Jeopardy, Non-Public Information, and Insider Trading Around SEC 10-K and 10-Q Filings.” Journal of Accounting and Economics, 43 (2007), 3–36.Google Scholar
Jaffe, J. F. “Special Information and Insider Trading.” Journal of Business, 47 (1974), 410–428.Google Scholar
Jagolinzer, A. D.; Larcker, D. F.; Ormazabal, G.; and Taylor, D. J.. “Political Connections and the Informativeness of Insider Trades.” Journal of Finance, 75 (2020), 1833–1876.Google Scholar
Jagolinzer, A. D.; Larcker, D. F.; and Taylor, D. J.. “Corporate Governance and the Information Content of Insider Trades.” Journal of Accounting Research, 49 (2011), 1249–1274.Google Scholar
Jeng, L. A.; Metrick, A.; and Zeckhauser, R. J.. “Estimating the Returns to Insider Trading: A Performance-Evaluation Perspective.” Review of Economics and Statistics, 85 (2003), 453–471.Google Scholar
Jenter, D. “Market Timing and Managerial Portfolio Decisions.” Journal of Finance, 60 (2005), 1903–1949.Google Scholar
Kacperczyk, M., and Pagnotta, E. S.. “Chasing Private Information.” Review of Financial Studies, 32 (2019), 4997–5047.Google Scholar
Keim, D. B., and Madhavan, A.. “Anatomy of the Trading Process: Empirical Evidence on the Behavior of Institutional Traders.” Journal of Financial Economics, 37 (1995), 371–398.Google Scholar
Kelly, P. “The Information Content of Realized Losses.” Review of Financial Studies, 31 (2018), 2468–2498.Google Scholar
Kyle, A. “Continuous Auctions and Insider Trading.” Econometrica, 53 (1985), 1315–1335.Google Scholar
Lakonishok, J., and Lee, I.. “Are Insider Trades Informative?” Review of Financial Studies, 14 (2001), 79–111.Google Scholar
Lee, D. S.; Mikkelson, W. H.; and Partch, M. M.. “Managers’ Trading Around Stock Repurchases.” Journal of Finance, 47 (1992), 1947–1961.Google Scholar
Marin, J. M., and Olivier, J.. “The Dog That Did Not Bark: Insider Trading and Crashes.” Journal of Finance, 63 (2008), 2429–2476.Google Scholar
McLean, R. D., and Pontiff, J.. “Does Academic Research Destroy Stock Return Predictability?” Journal of Finance, 71 (2016), 5–32.Google Scholar
Meulbroek, L. K. “An Empirical Analysis of Illegal Insider Trading.” Journal of Finance, 47 (1992), 1661–1699.Google Scholar
Newey, W. K., and West, K. D.. “A Simple, Positive Semi-Definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix.” Econometrica, 55 (1987), 703–708.Google Scholar
Piotroski, J. D., and Roulstone, D. T.. “Do Insider Trades Reflect Both Contrarian Beliefs and Superior Knowledge About Future Cash Flow Realizations?” Journal of Accounting and Economics, 39 (2005), 55–81.Google Scholar
Ravina, E., and Sapienza, P.. “What Do Independent Directors Know? Evidence from Their Trading.” Review of Financial Studies, 23 (2010), 962–1003.Google Scholar
Seyhun, H. N. “Insiders’ Profits, Costs of Trading, and Market Efficiency.” Journal of Financial Economics, 16 (1986), 189–212.Google Scholar
Seyhun, H. N. “The Information Content of Aggregate Insider Trading.” Journal of Business, 61 (1988), 1–24.Google Scholar
Seyhun, H. N. “Why Does Aggregate Insider Trading Predict Future Stock Returns?” Quarterly Journal of Economics, 107 (1992), 1303–1331.Google Scholar
Skaife, H. A.; Veenman, D.; and Wangerin, D.. “Internal Control over Financial Reporting and Managerial Rent Extraction: Evidence from Profitability of Insider Trading.” Journal of Accounting and Economics, 55 (2013), 91–110.Google Scholar
Wu, W. “Insider Purchases After Short Interest Spikes: A False Signaling Device?” Fama–Miller Working Paper and Chicago Booth Research Paper No. 14-04 (2018).Google Scholar
Yermack, D. “Deductio’ Ad Absurdum: CEOs Donating Their Own Stock to Their Own Family Foundations.” Journal of Financial Economics, 94 (2009), 107–123.Google Scholar
Supplementary material: PDF

Goldie et al. supplementary material

Goldie et al. supplementary material

Download Goldie et al. supplementary material(PDF)
PDF 604.2 KB