Are Insider Trades Informative?

TLDR

The study analyzes insider trading across NYSE, AMEX, and Nasdaq from 1975 to 1995. Insider trades generate minimal market impact, yet insiders act as contrarian investors whose purchase activity predicts market movements and cross‑sectional returns—especially in smaller firms—while sales show no predictive power.

Abstract

We examine insider trading activities of all companies traded on the NYSE, AMEX, and Nasdaq during the 1975–1995 period. In general, very little market movement is observed when insiders trade and when they report their trades to the SEC. Insiders in aggregate are contrarian investors. However, they predict market movements better than simple contrarian strategies. Insiders also seem to be able to predict cross-sectional stock returns. The result, however, is driven by insider's ability to predict returns in smaller firms. In addition, informativeness of insiders' activities is coming from purchases, while insider selling appears to have no predictive ability.