Firm-level Sentiment and Insider Trading

52 Pages Posted: 16 Apr 2024

See all articles by Lawrence Kryzanowski

Lawrence Kryzanowski

Concordia University, Quebec - John Molson School of Business

Ali Rouhghalandari

John Molson School of Business, Concordia University

Yanting Wu

Saint Mary's University, Canada - Department of Finance, Information Systems & Management Science

Date Written: April 14, 2024

Abstract

We find that insiders use a contrarian trade-timing strategy based on firm-level sentiment as proxied by two independent sentiment metrics extracted from newspapers, websites, and social media and from overnight returns. The baseline relations are stronger for windows proximate to earnings announcements with lower litigation risk, and are weaker after months of more intense insider trading actions by the SEC. The baseline relations between the sentiment proxies and the likelihood of insider trades are related to firm attributes, such as R&D intensity or number of analysts, and are similar for trades in or out of an SEC 10b5-1 plan. We observe consistently positive and significant abnormal returns and dollar paper profits for not-round-trip transactions by insiders and significantly positive (negative) actual abnormal-return (dollar) profits for round-trip insider transactions. We find weak support that trade-timing based on sentiment significantly affects insider trading profitability. Overall, the study contributes to our understanding of the motives behind insider trading decisions and emphasizes the role of different types of firm-level sentiment and role of litigation risk in shaping insider trade behavior.

Keywords: Insider trading, Firm-related (non-)trade-specific sentiment, Overnight returns, Litigation risk, Earnings announcements windows

JEL Classification: G1, G3, G14, G38, G40, G41, K22

Suggested Citation

Kryzanowski, Lawrence and Rouhghalandari, Ali and Wu, Yanting, Firm-level Sentiment and Insider Trading (April 14, 2024). Available at SSRN: https://ssrn.com/abstract=4794121 or http://dx.doi.org/10.2139/ssrn.4794121

Lawrence Kryzanowski

Concordia University, Quebec - John Molson School of Business ( email )

1455 de Maisonneuve Blvd. W.
Montreal, Quebec H3G 1M8
Canada

Ali Rouhghalandari

John Molson School of Business, Concordia University ( email )

Montreal
Canada

Yanting Wu (Contact Author)

Saint Mary's University, Canada - Department of Finance, Information Systems & Management Science ( email )

Halifax, Nova Scotia B3H 3C3
Canada

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