How do Insider Purchases Inform?
70 Pages Posted: 11 Nov 2019 Last revised: 16 Sep 2021
Date Written: October 30, 2019
The short answer is indirectly and ambiguously. Indirectly, because the price system does not initially act as an information-revealing mechanism when insider purchases are made public. Ambiguously, because before trading, investors bear costs to assess the innate credibility of the insider trade as an informative signal. We find that investors view an open market purchase as credible when they can plausibly infer that risk-averse, under-diversified insiders are willing to bear higher personal risk. These results are consistent with a risk and asymmetry view of purchases where asymmetry is necessary, but not sufficient for insider purchases to inform or to occur.
Keywords: Insider purchases, Risk, Asymmetry, Incidence, Informativeness, Credibility, Compensation Risk, Delta, Vega, Options
JEL Classification: G31; G32; G34; M40
Suggested Citation: Suggested Citation