How Do Insiders Trade?

66 Pages Posted: 9 Oct 2016 Last revised: 18 Jan 2018

See all articles by Patrick Augustin

Patrick Augustin

McGill University, Desautels Faculty of Management

Menachem Brenner

New York University (NYU) - Department of Finance

Gunnar Grass

HEC Montréal

Marti G. Subrahmanyam

New York University - Stern School of Business

Date Written: September 28, 2016

Abstract

We characterize how informed investors trade in the options market ahead of corporate news when they receive private, but noisy, information about (i) the timing of the announcement and (ii) its impact on stock prices. Our theoretical framework generates a rich set of predictions about the insiders’ behavior and their maximum expected returns. Three different analyses offer empirical support for our approach. First, predicted trades resemble illegal insider trades documented in SEC litigation cases with insiders being more likely to trade in options that offer higher expected returns. Second, pre-announcement patterns in unusual activity in the options market ahead of significant corporate news are consistent with the predictions of our framework. We employ our approach to characterize informed trading ahead of twelve different types of news including the announcement of earnings, corporate guidance, M&As, product innovations, management changes, and analyst recommendations. Third, to address concerns that pre-announcement patterns are driven by speculation, we show that measures capturing trading activity in call (put) options with high expected returns predict significant positive (negative) corporate news in the aggregate cross-section.

Keywords: Insider Trading, Market Microstructure, Corporate Announcements, Extreme Price Movements, Equity Options

JEL Classification: G12, G13, G14, K42

Suggested Citation

Augustin, Patrick and Brenner, Menachem and Grass, Gunnar and Subrahmanyam, Marti G., How Do Insiders Trade? (September 28, 2016). CFS Working Paper, No. 541. Available at SSRN: https://ssrn.com/abstract=2848989 or http://dx.doi.org/10.2139/ssrn.2848989

Patrick Augustin

McGill University, Desautels Faculty of Management ( email )

1001 Sherbrooke Street West
Quebec
Montreal, Quebec H3A 1G5
Canada

HOME PAGE: http://www.patrickaugustin.se

Menachem Brenner

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0323 (Phone)
212-995-4233 (Fax)

Gunnar Grass

HEC Montréal ( email )

3000, Chemin de la Côte-Sainte-Catherine
Montreal, Quebec H3T2A7
Canada
5143401540 (Phone)

Marti G. Subrahmanyam (Contact Author)

New York University - Stern School of Business ( email )

Stern School of Business,
44 West 4th Street, Suite 9-68
New York, NY 10012-1126
United States
212-998-0348 (Phone)
212-995-4233 (Fax)

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