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

See all articles by Michael Hagenau

Michael Hagenau

University of Freiburg

Adriana Korczak

University of Bristol - School of Economics, Finance and Management

Dirk Neumann

University of Freiburg

Date Written: July 15, 2012

Abstract

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

Hagenau, Michael and Korczak, Adriana and Neumann, Dirk, Buy on Bad News, Sell on Good News: How Insider Trading Analysis Can Benefit from Textual Analysis of Corporate Disclosures (July 15, 2012). FinanceCom 2012, Barcelona, Spain. Available at SSRN: https://ssrn.com/abstract=2138154 or http://dx.doi.org/10.2139/ssrn.2138154

Michael Hagenau (Contact Author)

University of Freiburg ( email )

Platz der alten Synagoge
Freiburg, D-79085
Germany

Adriana Korczak

University of Bristol - School of Economics, Finance and Management ( email )

8 Woodland Road
Bristol, BS8 1TN
United Kingdom
+441173941490 (Phone)

Dirk Neumann

University of Freiburg ( email )

Albert-Ludwigs-Universität Freiburg, Wirtscha.inf.
Kollegiengebäude II, Platz der Alten Synagoge
Freiburg im Breisgau, 79098
Germany

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