Trading Ahead of Barbarians' Arrival at the Gate: Insider Trading on Non-Inside Information

Abstract

Privately informed about firm fundamentals, corporate insiders detect activism-motivated trades better than other traders. This paper solves the model of this novel form of insider trading motivated by non-insider information and presents empirical evidence. Corporate insiders preserve their ownership (restraining from selling or buying more) before activist interventions go public to benefit from price appreciation and to defend their private benefits of control. Response to real-time (pre-disclosure) activist trading is stronger precisely when positive information about firm fundamentals is absent, supporting the mechanism that insiders attribute order flows to activist interest when speculation on fundamentals can be ruled out.

Keywords: insider trading, activist trading, shareholder activism

JEL Classification: G14,G34