Trading against the Grain: When Insiders Buy High and Sell Low

Abstract

Both behavioral biases and informational advantages can drive insider trades. The authors document that US corporate insiders anchor on the 52-week low (high) for stock purchases (sales). They then find that insider trades made when stock prices are far from their anchor levels are more informative, suggesting that when insiders trade against the anchoring bias, private information is providing the catalyst to overcome the bias. The authors further show that outside investors can reap sizeable abnormal returns by piggybacking on insiders who make these buy-high, sell-low trades.

TOPICS: Exchanges/markets/clearinghouses, information providers/credit ratings

Key Findings

• • Corporate insiders are subject to anchoring bias when they trade. They tend to buy (sell) more when the stock price is near its anchor—the 52-week low (high).

• • Private information can help insiders overcome the anchoring bias. When insiders buy high and sell low, their trades are informative.

• • Outside investors can piggyback these “buy high and sell low” trades and reap sizeable returns.