The Profits to Insider Trading: A Performance-Evaluation Perspective

Leslie A. Jeng, Andrew Metrick, Richard Zeckhauser

NBER Working Paper No. 6913
Issued in January 1999
NBER Program(s):Asset Pricing

This paper estimates the profits to insiders when they trade their company's stock. We construct a rolling purchase portfolio' that holds all shares purchased by insiders over the previous year and an analogous sale portfolio' that holds all shares sold by insiders over the previous year. We then analyze the returns to these value-weighted portfolios using performance-evaluation methods. This approach allows us to study the returns to insider transactions beginning on the day after their execution, and is free of the statistical difficulties that plague event studies on long-horizon returns. Using a comprehensive sample of reported insider transactions from 1975 - 1996, we find that the purchase portfolio earns abnormal returns of about 40 basis points per month, with about one-sixth of these abnormal returns accruing within the first five days after the initial transaction, and one-third within the first month. The sale portfolio does not earn abnormal returns. Our portfolio-based approach also allows for straightforward decompositions of the purchase and sale portfolios by various characteristics. We find that the abnormal returns to insider trades in small firms are not significantly different from those in large firms, and that top executives do not earn higher abnormal returns than do other insiders.

download in pdf format
   (259 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w6913

Users who downloaded this paper also downloaded* these:
Lakonishok and Lee w6656 Are Insiders' Trades Informative?
Du and Wei w9541 Does Insider Trading Raise Market Volatility?
Bebchuk and Fershtman t0096 The Effects of Insider Trading on Insiders' Choice Among Risky Investment Projects
Cohen, Malloy, and Pomorski w16454 Decoding Inside Information
Borjas, Grogger, and Hanson w12518 Immigration and African-American Employment Opportunities: The Response of Wages, Employment, and Incarceration to Labor Supply Shocks
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us