Investment Intelligence from Insider Trading

443 Pages·2015·1.302 MB·English

by  H. Nejat Seyhun

Investment Intelligence from Insider Trading

Investment Intelligence from Insider Trading
H. Nejat Seyhun
The MIT Press
Cambridge, Massachusetts
London, England
(cid:211) 1998MassachusettsInstituteofTechnology
Allrightsreserved.Nopartofthisbookmaybereproducedinanyformbyanyelectronic
or mechanical means (includingphotocopying, recording,or informationstorage and
retrieval)withoutpermission inwritingfromthepublisher.
Thisbookwasset inStoneSansandStoneSerifbyAchornGraphicServices,Inc.
Printedandboundinthe UnitedStatesofAmerica.
Seyhun,HasanNejat,1954–
Investmentintelligencefrominsidertrading/H. NejatSeyhun.
p. cm.
Includes bibliographicalreferencesandindex.
ISBN0-262-19411-2(hc:alk. paper)
1. Insidertradinginsecurities—UnitedStates. I. Title.
HG4910.S416 1998
364.16¢8—dc21 98-24347
CIP
To the loving memory of my parents

Contents
Preface xiii
Acknowledgments xvii
Introduction xix
1 Insider-trading patterns 1
Some preliminaries 1
Conflicting transactions 3
Frequency of insider trading 5
Insider-trading cycles 6
Probability of trading againstinsiders 8
Normal insider-trading patterns 14
Seasonal patterns in insider trading 17
Do insidersmanipulate stock prices? 18
Insider-trading regulations 23
Should insider trading be regulated? 28
Conclusions and investment implications 32
2 Does insider tradingpredict future stockreturns? 35
Background 35
Stock price movements following insiders’ transactions 37
Relative performance 41
Contents viii
Year-to-year profitability of insider trading 43
Duration of the stock price reaction to insidertrading 46
Prior stock price movements 49
Profitability of active and passive transactions 54
Strengthening insider-trading signals 58
Do insidersmanipulate stock prices? 61
Conclusions and investment implications 63
3 A stock-picking strategy 67
Additional indicators of profitability 67
Identity of insiders 68
Volume and profitability of insider trading 74
Interaction between volume and identity of insiders 80
Volume and officers and directors 83
Volume and top executives 84
Sales versus purchases 86
Firm size and profitability of insider trading 89
Interaction among identity of insiders, firm size, and volume of
trade 92
Consensus among insiders 98
Insiders’ option exercises and other transactions 100
Conclusions and investment implications 104
4 Predicting future marketreturns 107
Market timing 107
Aggregate insidertrading 109
Aggregate insidertrading and future real activity 111
50%–50% rule 114
Implications for the mutual fund investor 124
Other cutoff rules 125
Other market-timing strategies based on aggregateinsider
trading 128
Contents ix
Predicting industry returns 131
Conclusions and investment implications 134
5 Crash of October 1987 and insider trading 137
Why did the stock market crash in October 1987? 137
Anatomy of the crash 140
Insider trading around the crash of October 1987 143
Conclusions and investment implications 149
6 Dividend yields and insider trading 151
Dividend yields and future stock returns 151
Predictive ability of the market dividend yield 153
Forecasting characteristics of dividend yields 155
Market dividend yields and aggregate insider trading 159
Intensive insider trading and dividend yields 164
Changes in dividend yields 166
Firm-specific dividend yields 170
Conclusions and investment implications 172
7 Dividend initiations 175
Why dofirms pay dividends? 175
Dividend initiation process 178
Stock price effects of dividend initiations 179
Dividend initiations and insider trading 180
Conclusions and investment implications 189
8 Earnings announcements 191
Information content of earnings announcements 191
Prior literature on earnings announcements 193
Stock price reaction around earnings announcements 194
Insider trading and earnings announcements 199
Insider trading, earnings surprise, and the stock price
drift 201