Special Information and Insider Trading

Trading by corporate officers, directors, and large stockholders, who are commonly called insiders, commands widespread attention in the financial community. Academicians are interested in the amount of special information insiders possess, as well as in the profit they earn from such knowledge. The average investor seeks out useful information in the Official Summary of Insider Trading,' the monthly report listing the transactions of corporate officials. Previous research on corporate insiders has focused on the profitability of their trading. Some researchers, examining months of intensive insider activity, have concluded that insiders can predict stock price movement up to 6 months subsequent to trading. Rogoff for example, examines 45 companies in which, within a single month, three or more insiders buy their company's stock and no insiders sell the stock.2 He finds that the returns to the insiders of these companies in the following 6 months are on average 91/2 percent greater than the return to the stock market as a whole. Glass examines 14 different calendar months and selects the eight securities with the greatest excess of buyers to sellers among insiders within a month.3 He finds that the average return on these securities is 10 percent above the return on the stock market as a whole in the 7 months following the individual months of intensive buying. Lorie and Niederhoffer investigate stock performance following months in which there are at least two more buyers than sellers or at least two more sellers than buyers among the insiders of a company.4 They find that a security experiencing an intensive buying month is more likely to advance than to decline relative to the market in the 6 months subsequent to the event. Conversely, a security experiencing an intensive selling month is more likely to decline than to advance relative to the market in the 6 months subsequent to the event. Driscoll examines the trading by insiders prior to dividend changes