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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 Authors

Lauren H. Cohen

Finance
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Christopher J. Malloy

Finance
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More from the Authors

    • April 2021
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    The Incentive for Legacy: Tsinghua University Education Foundation

    By: Lauren Cohen, Hao Gao and Spencer C.N. Hagist
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    Litigation Finance 2.0: LexShares

    By: Lauren Cohen, Spencer C. N. Hagist and Yago Zavalia Gahan
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    Lidya: Bringing Nigerian FinTech Innovation to Global Small and Medium Enterprises

    By: Lauren Cohen and Spencer C.N. Hagist
More from the Authors
  • The Incentive for Legacy: Tsinghua University Education Foundation By: Lauren Cohen, Hao Gao and Spencer C.N. Hagist
  • Litigation Finance 2.0: LexShares By: Lauren Cohen, Spencer C. N. Hagist and Yago Zavalia Gahan
  • Lidya: Bringing Nigerian FinTech Innovation to Global Small and Medium Enterprises By: Lauren Cohen and Spencer C.N. Hagist
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