The Dollar Profits to Insider Trading
Review of Finance, 2021, 25(5): 1547–1580
101 Pages Posted: 19 Dec 2016 Last revised: 3 Nov 2021
Date Written: March 31, 2021
This paper studies insider trading quantities and dollar profits to measure the benefits insiders extract from their superior information. Dollar profits are economically small for a typical insider, the median insider earning $464 per year. The correlation between dollar profits and percentage returns is moderate, because returns are negatively correlated with trade size and frequency. We show that these correlations vary with proxies for insider preferences, firm-level monitoring, and regulatory scrutiny. As a consequence, variables that predict percentage returns fail to predict dollar profits, and past dollar profits are negatively related to future returns. Our work suggests that dollar profits are a better measure for corporate governance applications of insider trading.
Keywords: insider trading, trading profits, corporate governance, executive compensation
JEL Classification: G14, G34, M52
Suggested Citation: Suggested Citation