The Dollar Profits to Insider Trading

81 Pages Posted: 19 Dec 2016 Last revised: 15 Dec 2019

See all articles by Peter Cziraki

Peter Cziraki

University of Toronto - Department of Economics; Tilburg Law and Economics Center (TILEC)

Jasmin Gider

Tilburg University - Tilburg University School of Economics and Management

Date Written: December 14, 2019

Abstract

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

Cziraki, Peter and Gider, Jasmin, The Dollar Profits to Insider Trading (December 14, 2019). TILEC Discussion Paper No. DP 2017-005, 14th Annual Mid-Atlantic Research Conference in Finance (MARC), Available at SSRN: https://ssrn.com/abstract=2887628 or http://dx.doi.org/10.2139/ssrn.2887628

Peter Cziraki (Contact Author)

University of Toronto - Department of Economics ( email )

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Toronto, Ontario M5S3G7
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+1 416 946 3298 (Phone)

HOME PAGE: http://www.economics.utoronto.ca/petercziraki

Tilburg Law and Economics Center (TILEC) ( email )

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Tilburg, 5000 LE
Netherlands

Jasmin Gider

Tilburg University - Tilburg University School of Economics and Management ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

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