How Informative Are Insider Trades and Analyst Recommendations?

Abstract

This study examines the dynamics between insider trades and analyst recommendations and evaluates the joint and relative informativeness of these two activities. We show that analyst recommendations significantly affect subsequent insider trading, but not vice versa. Surprisingly, insiders in aggregate purchase more shares following analyst downgrades and sell more shares following upgrades. This pattern persists even after controlling for insiders' contrarian trading tendency of buying shares after price declines and selling shares after price rises. Analysts, in contrast, do not materially take into account insider trading when revising their recommendations. Further, the return analysis shows that both insider trading and analyst recommendation revisions continue to provide valuable information about future returns even in the presence of the other group's activity. More importantly, the informativeness of insider trading is independent of analysts' activity whereas analyst recommendations are informative only when insiders exhibit more sales than buys or when they do not trade. Overall, our findings highlight the important dynamics and financial market consequences between the two groups of information providers.

Keywords: insider trading; analyst recommendations; information; return predictability

JEL Classification: G11; G14; G29