Aggregate Insider Trading and the Predictability of Market Returns: Contrarian Strategy or Managerial Timing?

29 Pages Posted: 15 Mar 2007

See all articles by Xiaoquan Jiang

Xiaoquan Jiang

Florida International University (FIU) - Department of Finance

Mir A. Zaman

University of Northern Iowa - Department of Finance

Date Written: January, 2007

Abstract

We decompose realized market returns into expected return, unexpected cash flow news and unexpected discount rate news to test the relation between aggregate market returns and aggregate insider trading. Our motivation is to distinguish whether the observed relation between market returns and insider trading is due to contrarian strategy or managerial timing. We find that (1) the predictive ability of aggregate insider trading is much stronger than what was reported in earlier studies (2) aggregate insider trading is strongly related to unexpected cash-flow news and (3) market expectations do not cause insider trading, contrary to what others have documented. These results strongly suggest that the predictive ability of aggregate insider trading is because of managerial timing rather than contrarian strategy. These results hold even after we control for information uncertainty by using firm size as proxies.

Keywords: Insider trading, Contrarian strategy,Predictability of market returns,Managerial timing

JEL Classification: G14

Suggested Citation

Jiang, Xiaoquan and Zaman, Mir, Aggregate Insider Trading and the Predictability of Market Returns: Contrarian Strategy or Managerial Timing? (January, 2007). Available at SSRN: https://ssrn.com/abstract=970987 or http://dx.doi.org/10.2139/ssrn.970987

Xiaoquan Jiang

Florida International University (FIU) - Department of Finance ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

Mir Zaman (Contact Author)

University of Northern Iowa - Department of Finance ( email )

Cedar Falls, IA 50614-0124
United States
319-273-2579 (Phone)
319-273-2922 (Fax)

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