Insider Trading and Anomalies

Abstract

We show that the insider trading pattern on anomaly long-short portfolio stocks can forecast anomaly returns. Specifically, we use the fraction of anomaly long-leg (shortleg) stocks being bought (sold) by insiders as a signal to extract insiders' information on expected returns of the anomaly. Based on a composite anomaly measure that combines 11 prominent anomalies, we show that the insider trading signal significantly forecasts anomaly returns both in-sample and out-of-sample. These findings also help disentangle the risk-based and the mispricing-based explanation for anomaly returns.

Keywords: Insider trading, anomalies, mispricing, return predictability