Decoding Inside Information





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    • Cohen and Malloy are at the Harvard Business School and NBER; Pomorski is at the University of Toronto. We would like to thank Dan Bergstresser, Sabrina Buti, John Campbell, Jeff Coles, Josh Coval, Chuck Dale, Craig Doidge, Esther Eiling, Ben Esty, Fritz Foley, Cam Harvey, Harold Hau, Inigo Fraser-Jenkins, Julian Franks, Robin Greenwood, Raymond Kan, Inmoo Lee, Jan Mahrt-Smith, Jennifer Marietta-Westberg, Jacob Oded, Jeff Pontiff, Bryan Routledge, Nejat Seyhun, Tao Shu, Rick Sias, Sunil Wahal, Jason Wei, the Associate Editor, an anonymous referee, and seminar participants at the United States Securities and Exchange Commission (SEC), AQR Capital, Arrowstreet Capital, Binghamton, Dartmouth University, Harvard Business School, University of Missouri, the Canada Pension Plan Investment Board, the Chicago Quantitative Alliance Annual Fall Conference, the China International Conference, the Center for Research in Securities Prices (CRSP) Forum, the European Finance Association Meeting in Frankfurt, the Inquire UK Conference in Cambridge, the Rothschild Caesarea Center 7th Annual Conference, Universidad Autonoma de Barcelona, and the Western Finance Association Meeting in Victoria for helpful comments and suggestions. We thank David Kim for outstanding research assistance, and we are grateful to Diego Garcia and Oyvind Norli for providing data on geographic locations of firm operations. We gratefully acknowledge funding from the National Science Foundation. We are also grateful for funding from INQUIRE UK. This article represents the views of the authors and not of INQUIRE.


Exploiting the fact that insiders trade for a variety of reasons, we show that there is predictable, identifiable “routine” insider trading that is not informative about firms’ futures. A portfolio strategy that focuses solely on the remaining “opportunistic” traders yields value-weighted abnormal returns of 82 basis points per month, while abnormal returns associated with routine traders are essentially zero. The most informed opportunistic traders are local, nonexecutive insiders from geographically concentrated, poorly governed firms. Opportunistic traders are significantly more likely to have SEC enforcement action taken against them, and reduce trading following waves of SEC insider trading enforcement.