The Dollar Profits to Insider Trading
81 Pages Posted: 19 Dec 2016 Last revised: 15 Dec 2019
Date Written: December 14, 2019
This paper studies insider trading quantities and dollar profits to measure the benefits insiders extract from their superior information. We find that several empirical results depend critically on using dollar profits instead of percentage returns. Dollar profits are economically small for a typical insider, the median insider earning $464 per year. Variables that predict percentage returns fail to predict dollar profits, because they are inversely related to trade frequency and trade size. Variation in trading intentions and SEC monitoring explain this divergence. First, we exploit bunching around the 6-month threshold set by the short-swing profit recovery rule to construct a new measure of intentions, which predicts both returns and profits. Second, we show that stronger SEC monitoring is associated with lower returns for some insiders, but higher trade frequency for others. Our work suggests that dollar profits are a better measure for testing agency-based theories of insider trading.
Keywords: insider trading, trading profits, corporate governance, executive compensation
JEL Classification: G14, G34, M52
Suggested Citation: Suggested Citation