When the stock price is far from its anchor level, stocks have more positive returns following insider purchases and more negative returns following insider sales. The study’s main contribution was to demonstrate when insider trades are most informative. However, insiders also possess private information about their firms, which allows them to mitigate anchoring bias. ![]() Their findings led Li, Wang, Yan and Zhang to conclude that the popular conventional wisdom of buying low and selling high makes investors, including insiders, easily subject to the anchoring bias. Results were highly significant and supported by various tests of robustness.A long-short trading strategy - buy high and sell low - based on these findings generated an average monthly abnormal return of around 2 percent before transaction costs. In contrast, the subsequent 30-day stock returns following low sells were at least 1.0 percentage point lower than after high sells. Subsequent 30-day stock returns following high buys using decile sorting were at least 3.3 percentage points higher than low buys.Consistent with prior literature findings that insider purchases are more informative than sales (sales can be made simply for diversification purposes), the return difference was more pronounced for insider purchases than for insider sales.Because insider trades are public knowledge (since 2002 all insiders are required to report their trades within two business days after the transaction date), outside investors can reap abnormal returns by piggybacking on insiders who make these buy-high, sell-low trades, as purchases (sales) made far above (below) the anchoring price provide abnormal returns. Returns were more negative following low sells than high sells, and returns were more positive following high buys than low buys.Purchases (sales) far from anchoring levels are made because the private information is positive (negative). Insider trades made when stock prices are far from their anchor levels are more informative - when insiders trade against their anchoring bias, it is private information that provides the catalyst to overcome the bias.The same anchoring bias was found on insider sales. This pattern was robust to various measures of insider trading activity. Demonstrating anchoring bias, insider purchases as a percentage of all insider trades decreased almost monotonically as the stock price moved from far below the 52-week high to very close to the 52-week high.Following is a summary of their findings: They sought to determine if insiders were susceptible to the same anchoring bias heuristic that individual retail investors have been shown to be subject to, and if their trades were informative as to future returns. In their recent, interesting study Trading Against the Grain: When Insiders Buy High and Sell Low, which appeared in the November 2019 issue of the Journal of Portfolio Management, Ruihai Li, Wesley Wang, Zhipeng Yan and Qunzi Zhang examined the trades of corporate insiders over the period 1986-2017. ![]() It has also found that insiders are typically contrarian traders: they buy value stocks, sell growth stocks and sell stocks with high short-term past returns. ![]() So what, if anything, do insider trades, and indeed non-trades, tell us about future returns? LARRY SWEDROE looks at the evidence.Īction is not only doing but no less omitting to do what possibly could be done.Īcademic research has found that the trades, especially the buys, of corporate insiders provide information as to future returns, and also has identified when their trades are most informative. Senior executives, who often receive share options as part of their remuneration, buy and sell shares in the companies they work for fairly regularly. But, depending on when they occur, insider trades can be perfectly legal. When you hear the phrase “insider trading’, you might automatically think of illegally exploiting non-public information for personal gain.
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