Leveling the Playing Field: Can Private Investors Benefit From Mimicking Insider Trades? A quantitative study of insider trading
Abstract
Historically, investors have been searching for strategies to maximize performance in the
stock market. It has been shown that corporate insiders can earn abnormal returns by trading
in their own companies as they possess superior information and, to a certain degree, market
timing ability. As the EU tries to cut down on market abuse, a new regulation was introduced
mandating insiders to report and publish trades within three business days. While many
studies have investigated the possibility for insiders to earn abnormal returns, far fewer have
explored the ability for outsiders to mimic insiders as an investment strategy. This study
contributes to this rather scarce research area by investigating the possibility of earning
abnormal returns by mimicking insider trades in Sweden, and if the magnitude of the returns
depend on the position of the insider that is mimicked. Through the use of an event study, we
examine insider buy and sell transactions and aim to answer the following: Can outside
investors earn abnormal returns by mimicking insiders in the Swedish stock market and does
the position of the insider affect the magnitude of the returns?
We find that outsiders are able to earn abnormal returns in the short term by mimicking
insiders’ buy and sell transactions. While mimicking an insiders sell transaction is found to
be beneficial for up to five days after the event, mimicking buy transactions is only found to
be profitable during a three day event window. When comparing these results to the abnormal
returns earned by the insiders themselves, we find that they are able to earn abnormal returns
for longer as the reaction to the perceived event does not happen during the date of the
publication but closer to, or during, the date of the transaction. We hypothesize that the
market observes abnormal trading activity during the transaction day and trades are made
based on this information. For both buy and sell transactions, company size is found to have
the greatest effect where investors trading in smaller companies are able to earn greater
abnormal returns. A possible explanation for this relationship is that the information
asymmetry present between smaller companies and outsiders is larger than that between
larger companies and outsiders. Additionally, we find that mimicking top executives such as
CEOs and CFOs as well as board members is superior compared to lower level insiders.
While no significant difference is found between top executives and board members,
mimicking CFOs enables outsiders to earn the greatest abnormal returns on average.
Degree
Master 2-years
Other description
Msc in Accounting and Financial Management
Collections
View/ Open
Date
2023-07-04Author
Mattsson, Marcus
Lyckhage, Marcus
Keywords
Insider Trading
Abnormal Return
Information Asymmetry
Outside Investors
Investment Strategy
Insider Positions
Series/Report no.
2023:168
Language
eng