The Dollar Profits to Insider Trading
76 Pages Posted: 19 Dec 2016 Last revised: 10 Jan 2019
Date Written: December 12, 2018
This paper studies trade quantities and dollar profits to insider trading, to investigate whether corporate insiders can exploit their superior information about the firm. We find that dollar profits are economically small for a typical insider, the median insider earning abnormal profits of $464 per year. Variables that predict percentage returns fail to predict dollar profits, suggesting that insiders with the largest superior information do not turn this advantage into profits. Insiders who trade infrequently make high returns, while insiders who trade frequently make large dollar profits. We exploit a legally-imposed discontinuity to construct a new measure of insiders’ intentions, which predicts both dollar profits and returns. This measure successfully identifies a small subset (0.5%) of insiders whose profits are significantly higher with a median of $2,500 per year. Finally, we use variation in SEC budgets over time to assess whether monitoring can explain the different distribution of returns and profits. Our work highlights that using dollar profits as opposed to percentage returns offers contrasting evidence on a number of questions about insider trading. We argue that profits are a more precise measure for testing agency theories.
Keywords: insider trading, trading profits, corporate governance, executive compensation
JEL Classification: G14, G34, M52
Suggested Citation: Suggested Citation