Transient institutional investors and insider trading signals

Juan Wang

15 citations0/0 files storedInternational Journal of Accounting and Information Management

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Financial Markets and Investment Strategies Corporate Finance and Governance Auditing, Earnings Management, Governance

Abstract

Purpose The aim of this paper is to examine how informed traders, i.e. transient institutional investors that actively trade on information to maximize investment profits, use insider trading signals in addition to accounting numbers to mitigate future abnormal returns. Design/methodology/approach Using a sample of 44,843 firm‐quarters from 1988 to 2001 in the USA, the paper examines how informed investors use insider trading signals and the extent to which the use of these signals by informed investors impacts insiders' future abnormal returns from trading. Findings This study finds that the change in transient institutional ownership in the next‐quarter is positively associated with net insider trading in the current quarter, after controlling for accounting information (including total accruals, unexpected earnings, etc.). In addition, this study finds that insider profits decrease in transient institutional ownership, consistent with the notion that trading by informed investors limits insider profits. Research limitations/implications The institutional ownership data are only available on a quarterly basis, which may not capture institutional investors' immediate response to insider trading signals. Originality/value This study provides systematic evidence on how informed traders use insider trading signals. This study adds to existing knowledge of the information environment of institutional investors by showing that transient institutional investors use insider trading signals in addition to accounting information in making investment decisions. Moreover, this study contributes to the literature on the determinants of insider profits by providing evidence that informed trading by investors has incremental power to explain insider profits.

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References

1985Continuous Auctions and Insider Trading 2005Performance matched discretionary accrual measures 1985Bid, ask and transaction prices in a specialist market with heterogeneously informed traders 1995The Limits of Arbitrage 2003Institutional Investors and Executive Compensation 1986Stock return variances 2001Institutional Investors and Equity Prices 2002The rewards to meeting or beating earnings expectations

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