The Characteristics of a Firm's Information Environment and the Predictive Ability of Insider Trades

37 Pages Posted: 8 Oct 2001

See all articles by Richard M. Frankel

Richard M. Frankel

Washington University in Saint Louis - Olin Business School

Xu Li

School of Business; University of Texas at Dallas - Department of Accounting & Information Management

Date Written: January 2002

Abstract

This study examines the relation between the ability of insider trades to predict future returns and the availability of firm information. It investigates the marginal effect of three information sources: financial statements, analyst following, and firm information provided by voluntary disclosures or general news coverage. Timely disclosure of value relevant information reduces insiders' ability to trade profitably on private information. Investors acquire timely information from a variety of sources, and information provided by one source can affect the production of information by other sources. Thus, we examine these major sources simultaneously to understand the marginal effects of each. We find that the ability of insider trades to predict future returns diminishes in situations of increased analyst following and financial statement informativeness. However, we are unable to find a significant relation between the availability of company news and the predictive ability of insider trades.

JEL Classification: G12, G29, M41, M45

Suggested Citation

Frankel, Richard M. and Li, Xu, The Characteristics of a Firm's Information Environment and the Predictive Ability of Insider Trades (January 2002). MIT Sloan Working Paper No. 4218-01. Available at SSRN: https://ssrn.com/abstract=286454 or http://dx.doi.org/10.2139/ssrn.286454

Richard M. Frankel (Contact Author)

Washington University in Saint Louis - Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Xu Li

School of Business ( email )

Pokfulam Road
Hong Kong, Pokfulam HK
China

University of Texas at Dallas - Department of Accounting & Information Management ( email )

2601 North Floyd Road
Richardson, TX 75083-0688
United States

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