How Informative Are Insider Trades and Analyst Recommendations?

80 Pages Posted: 21 Mar 2005 Last revised: 16 Oct 2019

See all articles by Jim Hsieh

Jim Hsieh

George Mason University

Lilian Ng

Schulich School of Business, York University; European Corporate Governance Institute (ECGI)

Qinghai Wang

University of Central Florida - College of Business Administration

Date Written: October 15, 2019

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

Suggested Citation

Hsieh, Jim and Ng, Lilian and Wang, Qinghai, How Informative Are Insider Trades and Analyst Recommendations? (October 15, 2019). Available at SSRN: https://ssrn.com/abstract=687584 or http://dx.doi.org/10.2139/ssrn.687584

Jim Hsieh

George Mason University ( email )

4400 University Dr, MSN 5F5
George Mason University
Fairfax, VA 22030
United States

Lilian Ng (Contact Author)

Schulich School of Business, York University ( email )

N223, Seymour Schulich Building
4700 Keele Street
Toronto, Ontario ON M3J 1P3
Canada
+1.416.736.2100 x77994 (Phone)

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Qinghai Wang

University of Central Florida - College of Business Administration ( email )

PO Box 161400
Orlando, FL 32816
United States

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