Buy on Bad News, Sell on Good News: How Insider Trading Analysis Can Benefit from Textual Analysis of Corporate Disclosures
FinanceCom 2012, Barcelona, Spain
27 Pages Posted: 30 Aug 2012 Last revised: 19 Sep 2012
Date Written: July 15, 2012
We demonstrate how insider trading analysis may benefit from textual analysis. We analyze reported insider trading behavior and explain the association between corporate as well as 3rd-party news announcements on directors’ dealings activity. Previous approaches are extended by adding the sentiment of news to the research setting. We find strong evidence that insiders follow the stock market adage “Buy on bad news, sell on good news”: They tend to buy (sell) securities in those years where their respective companies issue negative (positive) news. Likewise, insiders tend to buy (sell) stocks in years when 3rd-party news coverage is pessimistic (optimistic). The impact of corporate news on insider trading is higher than for 3rd-party news, as corporate news are subject to direct influence by the insiders. We also find that insiders buy when next year’s news improves compared to the current year. Looking more concretely into the language, we also demonstrate that insiders buy when expressing insecurity and uncertainty. Overall, the findings reveal additional insights for insider trading analysis and demonstrate how finance may benefit from textual analysis.
Keywords: text mining, sentiment, textual analysis, insider trading, tone of news, corporate news
JEL Classification: G14, G18, G34
Suggested Citation: Suggested Citation