Insiders' information advantage: Evidence from competition with short sellers

72 Pages Posted: 18 Mar 2017 Last revised: 14 Jun 2021

See all articles by Harold Contreras

Harold Contreras

Faculty of Economics and Business - University of Chile

Jana P. Fidrmuc

Warwick Business School - Finance Group

Roman Kozhan

University of Warwick - Warwick Business School

Date Written: March 15, 2017

Abstract

This paper studies patterns of insider trading in the presence of foreknowledge of long-term material information and short-term mispricing. Using a sample of U.S. stocks in the period after increased regulatory restriction we document that both insiders' purchases and sales predict future returns. Conditioning on the short-selling activity after earnings announcements as a proxy for demand of arbitrageurs who trade to exploit short-term mispricing, we show that insiders profit from selling because of their ability to exploit mispricing after public news releases. Insiders' purchases, in contrast, do exploit insiders' foreknowledge of long-term material information. Most of the informed insider trading comes from opportunistic insider transactions. Our paper contributes to the discussion about (in)effectiveness of regulatory restrictions concerning insider trading.

Keywords: Insider trading, Short selling, Informed trading, Earnings announcements

JEL Classification: G14, G19, G39, M41

Suggested Citation

Contreras, Harold and Fidrmuc, Jana P. and Kozhan, Roman, Insiders' information advantage: Evidence from competition with short sellers (March 15, 2017). Available at SSRN: https://ssrn.com/abstract=2934133 or http://dx.doi.org/10.2139/ssrn.2934133

Harold Contreras

Faculty of Economics and Business - University of Chile ( email )

Universidad de Chile
Diagonal Paraguay 257
Santiago
Chile

Jana P. Fidrmuc

Warwick Business School - Finance Group ( email )

Warwick Business School
Coventry CV4 7AL
United Kingdom

Roman Kozhan (Contact Author)

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

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