Understanding Insider Trading By Top Executives

To get at managers' thinking about their own firms, the author analyzed the insider trading decisions of top executives in approximately 2,500 publicly traded firms over the period from 1993 to 2001. Probably the most surprising finding is that true inside information - the kind that tends to get insiders into trouble with the SEC - plays at most a minor role in the insider trading decisions of top executives. This small role is reflected in the finding that insiders' returns, properly measured, aren't really all that much better than what an outside investor could get by following a few simple rules. An outside investor could have simply bought a diversified portfolio of small-cap stocks with high yields and low price-to-earnings ratios, and would have received almost the same return (with lower risk) as the group of insiders in the author's study.