Transient institutional investors and insider trading signals

Juan Wang

International Journal of Accounting & Information Management, 2011, vol. 19, issue 2, 118-145

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.

Keywords: Accounting; Investors; Insider trading; Accounting information; Singapore (search for similar items in EconPapers)
Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:eme:ijaimp:v:19:y:2011:i:2:p:118-145

DOI: 10.1108/18347641111136436

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