Can Traders Beat the Market? Evidence from Insider Trades

Abstract

Using the comprehensive trading data for the U.S. corporate insiders between 1993 and 2008, we document robust evidence that insiders as a whole achieve transaction prices superior to the volume-weighted average prices. This outperformance, expressed as a positive trading alpha, remains after we control for trade difficulty, insider reputation and the corporate role ranks of insiders. Upon analyzing the time series patterns of portfolio returns to strategies of mimicking corporate insiders with abnormal trading alphas in the extreme quartiles, we conclude that the outperforming insiders at the aggregate level resemble value investors who act on long-term fundamental information, trade patiently and earn rents from providing liquidity. Moreover, outside investors benefit from mimicking the acts of outperforming insiders in real time. The sizeable profit from this mimicking strategy withstands the erosion from adjustments for standard factors in the asset pricing literature and the adjustment for stock characteristics.

Keywords: Insider Trading, VWAP, Transaction Costs, Trading Alpha, Investment Style

JEL Classification: G10, G14