Private Information behind Insider Trades: Evidence from Cross Section and Time Series

Abstract

We examine the private information associated with insider trades using a Chinese data set. Insider buys positively forecast individual stock returns and insider sales negatively forecast individual stock returns. Classifying insiders as corporate managers and institutional investors, we find that the trades by these two types have different asset pricing implications. Cross-sectionally, stocks more heavily bought by corporate managers have higher average returns compared to their less-bought counterparts, but institutional investor trading has no impact on cross-sectional differences in average returns. The economic value of institutional investors’ trades primarily derives from their time-series return predictability, as the collective buy-to-sell ratio of institutional investors significantly forecasts market returns. In contrast, the buy-to-sell ratio of corporate managers shows no predictive power.