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The Profits to Insider Trading: a Performance-Evaluation Perspective

58 Pages Posted: 12 Jun 2000  

Leslie A. Jeng

Harvard Business School

Richard J. Zeckhauser

Harvard University - Harvard Kennedy School (HKS); National Bureau of Economic Research (NBER)

Andrew Metrick

Yale School of Management; National Bureau of Economic Research (NBER)

Date Written: January 1999

Abstract

This paper estimates the profits to insiders when they trade their company's stock. We construct a rolling purchase portfolio' that holds all shares purchased by insiders over the previous year and an analogous sale portfolio' that holds all shares sold by insiders over the previous year. We then analyze the returns to these value-weighted portfolios using performance-evaluation methods. This approach allows us to study the returns to insider transactions beginning on the day after their execution, and is free of the statistical difficulties that plague event studies on long-horizon returns. Using a comprehensive sample of reported insider transactions from 1975 - 1996, we find that the purchase portfolio earns abnormal returns of about 40 basis points per month, with about one-sixth of these abnormal returns accruing within the first five days after the initial transaction, and one-third within the first month. The sale portfolio does not earn abnormal returns. Our portfolio-based approach also allows for straightforward decompositions of the purchase and sale portfolios by various characteristics. We find that the abnormal returns to insider trades in small firms are not significantly different from those in large firms, and that top executives do not earn higher abnormal returns than do other insiders.

Suggested Citation

Jeng, Leslie A. and Zeckhauser, Richard J. and Metrick, Andrew, The Profits to Insider Trading: a Performance-Evaluation Perspective (January 1999). NBER Working Paper No. w6913. Available at SSRN: https://ssrn.com/abstract=226391

Leslie A. Jeng (Contact Author)

Harvard Business School

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Richard J. Zeckhauser

National Bureau of Economic Research (NBER) ( email )

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Harvard University - Harvard Kennedy School (HKS) ( email )

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Andrew Metrick

Yale School of Management ( email )

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HOME PAGE: http://faculty.som.yale.edu/andrewmetrick/

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
United States

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