Investment Intelligence from Insider Trading
The term insider trading refers to the legal stock transactions of the officers, directors, and large shareholders of a firm. Many investors believe that corporate insiders, informed about their firms' prospects, buy and sell their own firm's stock at favorable times, reaping significant profits. The key question for stock market investors is whether publicly available insider-trading information can help them to outperform a simple passive index fund.
Basing his insights on an exhaustive data set that captures information on all reported insider trading in all publicly held firms over a period of twenty-one years—over one million transactions!—H. Nejat Seyhun shows how investors can use insider information to their advantage. He documents the magnitude and duration of the stock price movements following insider trading, determinants of insiders' profits, and the risks associated with imitating insider trading. He looks at the likely performance of individual firms and of the overall stock market, and compares the value of what one can learn from insider trading with commonly used measures of value such as price-earnings ratio, book-to-market ratio, and dividend yield.
"Considering the arcane nature of his subject, Seyhun manages genuine readability."—Publishers Weekly
". . . insider information is becoming more widely available. . . . Now, it may be easier to fathom, too."—Robert Barker, Business Week
"Seyhun carefully proves that every major tested strategy to beat the market works best when insiders have bought their own company's stock. We have used several of the strategies suggested by Seyhun, and they work! Don't buy this wonderful book. We don't need the competition!"
—John D. Spears, Co-Manager, Tweedy, Browne American Value Fund and Tweedy, Browne Global Value Fund, and coauthor of What Has Worked in Investing
"Seyhun is one of the leading academic experts on inside trading. His well-written and readable book on this subject is a valuable resource for both investors and researchers."
—Andrei Shleifer, Professor of Economics, Harvard University
"We have long taught our business school students that corporate managers have better information about their companies' prospects and values than outside investors. But investment strategies based on mechanical responses to insider sales and purchases have routinely failed to beat the market averages. This book explains why and, in so doing, provides a guide that should help investors understand which corporate insiders have access to important information (not all insiders are created equal) and when insiders purchases are likely to be reliable signals of future improvement."
—Joel Stern, Managing Partner, Stern Stewart and Co.
"Professor Seyhun has written a serious, highly readable, and useful analysis of the informational content available to an outsider wishing to follow in the stock-picking tracks of an insider. Investors willing to 'mimic' large trades by top executives of smaller companies may find gold. The methods require attention to detail, prompt decision-making and are not without risk. The risk can be reduced by 'mimicking' 50 to 100 insider transactions. There may well be stock-picking gold in the informational content of the insider trading data, but it is more akin to dredging than picking up nuggets. Market timers and asset allocators will be encouraged by evidence that aggregate insider trading data forecasts future stock returns; there is additional useful information in industry-wide trading. Professor Seyhun has done the academic and investor world a great service."
—Wesley G. McCain, PhD, CFA, Chairman, Towneley Capital Management, Inc.