Relative Idiosyncratic Volatility and the Timing of Corporate Insider Trading

Abstract

This paper investigates whether corporate insiders trade when asymmetric information is high, using data on U.S. corporate insider transactions between 1986 and 2012. The key innovation of this paper is our proxy for asymmetric information relivol which measures deviations of idiosyncratic volatility from a firm's normal level. Our findings indicate that relivol positively predicts insider purchases, which indicates that insiders buy shares when their informational advantage is high. However, insiders appear to sell less if relivol is high, which is consistent with existing evidence on sales being driven by alternative, non-information related trading motives such as liquidity or diversification needs. Further, we find that profits are significantly higher when insiders buy during periods of high relivol, but not when they sell shares.

Keywords: insider trading, information asymmetry, idiosyncratic volatility

JEL Classification: G14, G34