Insider Selling on Public Information: Evidence from Competition with Short Sellers

64 Pages Posted: 18 Mar 2017

See all articles by Harold Contreras

Harold Contreras

Faculty of Economics and Business - University of Chile

Jana P. Fidrmuc

Warwick Business School - Finance Group

Roman Kozhan

University of Warwick - Warwick Business School

Date Written: March 15, 2017

Abstract

This paper shows that insiders trade on public information just after earnings announcements. Using a sample of US stocks, we analyze insider trading in the context of short-selling activity and show that insiders sell significantly more often and more shares when short sellers are also highly active. Moreover, the speed of information dissemination is significantly higher when both insiders and short sellers sell intensively. Together, these findings imply that insiders' and short-sellers' signals are highly correlated. Previous literature has shown that short sellers possess superior information-processing skills that allow them to trade profitably after public-information releases. Our evidence suggests that insiders, just as short sellers, interpret publicly-available earnings news and sell when their stock is overpriced. Insiders tend to stop selling and even start buying when the stock is underpriced. Competition between the two types of informed traders increases the speed of information dissemination, which improves stock-market efficiency.

Keywords: Insider trading, Short selling, Informed trading, Earnings announcements

JEL Classification: G14, G19, G39, M41

Suggested Citation

Contreras, Harold and Fidrmuc, Jana P. and Kozhan, Roman, Insider Selling on Public Information: Evidence from Competition with Short Sellers (March 15, 2017). Available at SSRN: https://ssrn.com/abstract=2934133 or http://dx.doi.org/10.2139/ssrn.2934133

Harold Contreras

Faculty of Economics and Business - University of Chile ( email )

Universidad de Chile
Diagonal Paraguay 257
Santiago
Chile

Jana P. Fidrmuc

Warwick Business School - Finance Group ( email )

Warwick Business School
Coventry CV4 7AL
United Kingdom

Roman Kozhan (Contact Author)

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

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