Do Insiders Exploit Anomalies?
60 Pages Posted: 3 Jul 2015 Last revised: 21 Nov 2018
Date Written: November 1, 2018
Many studies document predictable stock returns known as anomalies. We investigate whether insiders exploit anomalies and the consequences of mandatory disclosure using a large backward-extended insider trading database from 1975 to 2014. Our results suggest that all 13 anomalies we consider are driven by mispricing, which is corrected shortly after insider trading becomes public, but only when the direction of insider trading agrees with the anomaly. Anomaly returns vanish when insider trading disagrees with the anomaly. We conclude that insiders exploit anomalies likely due to mispricing, and required disclosures improve price efficiency while offering sophisticated investors higher anomaly alphas.
Keywords: Anomalies, behavioral finance, asset pricing, factor models, market efficiency, insider trading
JEL Classification: G11, G12, G14, G17
Suggested Citation: Suggested Citation