The Dollar Profits to Insider Trading
77 Pages Posted: 19 Dec 2016 Last revised: 2 May 2019
Date Written: April 30, 2019
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, because they are inversely related to quantities, suggesting that insiders with the largest superior information do not turn this advantage into large economic rents. We exploit bunching around a legally-imposed threshold 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 find that dollar profits do not unambiguously decrease with SEC monitoring because of changes in the composition of insiders: returns decrease for some insiders but trade frequency increases for others. Our work highlights that several empirical results depend critically on using dollar profits instead of percentage returns. The profits to legal insider trading are not a meaningful source of private benefits for the vast majority of insiders.
Keywords: insider trading, trading profits, corporate governance, executive compensation
JEL Classification: G14, G34, M52
Suggested Citation: Suggested Citation