An empirical analysis of corporate insiders' trading performance

Qin Lei (Department of Finance, Cox School of Business, Southern Methodist University, Dallas, Texas, USA)
Murli Rajan (Department of Economics and Finance, Kania School of Management, University of Scranton, Scranton, Pennsylvania, USA)
Xuewu Wang (Department of Economics and Finance, Kania School of Management, University of Scranton, Scranton, Pennsylvania, USA)

China Finance Review International

ISSN: 2044-1398

Publication date: 8 June 2012

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.

Keywords

Citation

Lei, Q., Rajan, M. and Wang, X. (2012), "An empirical analysis of corporate insiders' trading performance", China Finance Review International, Vol. 2 No. 3, pp. 246-264. https://doi.org/10.1108/20441391211231033

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Publisher

:

Emerald Group Publishing Limited

Copyright © 2012, Emerald Group Publishing Limited

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