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Publications
Publications
  • June 2012
  • Article
  • Journal of Finance

Decoding Inside Information

By: Lauren Cohen, Christopher Malloy and Lukasz Pomorski
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Abstract

Using a simple empirical strategy, we decode the information in insider trading. Exploiting the fact that insiders trade for a variety of reasons, we show that there is predictable, identifiable "routine" insider trading that is not informative for the future of firms. Stripping away the trades of routine insiders leaves a set of information-rich trades by "opportunistic" insiders that contain all the predictive power in the insider trading universe. A portfolio strategy that focuses solely on opportunistic traders yields value-weighted abnormal returns of 82 basis points per month, while the abnormal returns associated with routine traders are essentially zero. Further, opportunistic insiders predict future firm-specific news, as well as announcement returns around future analyst forecasts, management forecasts, and earnings announcements, while routine traders do not. The most informed opportunistic traders are local non-senior insiders, who come from geographically concentrated, poorly governed firms. Lastly, opportunistic traders are significantly more likely to have SEC enforcement action taken against them and reduce their trading following waves of SEC insider trading enforcement.

Keywords

Strategy; Financial Markets; Forecasting and Prediction; Law Enforcement; Opportunities; Geographic Location; Business Earnings

Citation

Cohen, Lauren, Christopher Malloy, and Lukasz Pomorski. "Decoding Inside Information." Journal of Finance 67, no. 3 (June 2012): 1009–1043. (Winner of Chicago Quantitative Alliance Academic Paper Competition. First Prize presented by Chicago Quantitative Alliance.  Winner of Institute for Quantitative Investment Research (INQUIRE) Grant presented by Institute for Quantitative Investment Research.)
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About The Author

Lauren H. Cohen

Finance
→More Publications

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More from the Authors
  • Rawbank's Illico Cash: Can 'Fast Money' Overcome Cash Dependency in the DRC? By: Lauren Cohen and Grace Headinger
  • From GOP to NFT: Anthony Scaramucci and the Launch of Flatter NFT By: Lauren Cohen, Richard Ryffel and Grace Headinger
  • Reclaiming the Land of Purple: Purpl’s Mission to Unlock Finance in Lebanon By: Lauren Cohen and Grace Headinger
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