The Conditional Performance of Insider Trades

Authors

  • B. Espen Eckbo,

    1. Stockholm School of Economics and the Norwegian School of Economics and Business Administration
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  • David C. Smith

    1. Norwegian School of Management
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    • * Eckbo is with the Stockholm School of Economics and the Norwegian School of Economics and Business Administration; Smith is at the Norwegian School of Management. We are grateful for the comments of Mark Britten-Jones, Øyvind Bɸhren, Glen Donaldson, Michael Cooper, Thore Johnsen, Kenneth Khang, Lisa Kramer, Ananth Madhavan, Maurizio Murgia, René Stulz (the editor), Raman Uppal and, in particular, Wayne Ferson. We also thank seminar participants at the Central Bank of Norway, Concordia University, London Business School, Norwegian School of Economics and Business Administration, Norwegian School of Management, Odense University, Stockholm School of Economics, University of British Columbia, University of North Carolina at Chapel Hill, University of Utah, Vanderbilt University, Virginia Tech, the 1995 European Finance Association meetings, and the 1996 Western Finance Association meetings. This research was supported by grant no. 125104–510 from the Norwegian Research Council.

Abstract

This paper estimates the performance of insider trades on the closely held Oslo Stock Exchange (OSE) during a period of lax enforcement of insider trading regulations. Our data permit construction of a portfolio that tracks all movements of insiders in and out of the OSE firms. Using three alternative performance estimators in a time-varying expected return setting, we document zero or negative abnormal performance by insiders. The results are robust to a variety of trade characteristics. Applying the performance measures to mutual funds on the OSE, we also document some evidence that the average mutual fund outperforms the insider portfolio.

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