Are the Insider Trades of a Large Institutional Investor Informed?

Authors


  • I thank John Clapp, Walt Dolde, Amy Dunbar, Carmelo Giaccotto, John Harding, Shanta Hegde, Lin Klein, Kevin McLaughlin, Tom O'Brien, Jim Sfiridis, Mike Willenborg, Gang Wu, participants at the 2004 Northern Finance Association Meetings, two anonymous referees, and Arnie Cowan (the editor) for helpful comments that improved the paper.

* Corresponding author: Finance Department, School of Business, University of Connecticut, 2100 Hillside Road, Unit-1041F, Storrs, CT 06269-1041; Phone: +1 860-486-6327; E-mail: jgolec@business.uconn.edu

Abstract

We use a unique data set to consider whether a large institution's (Fidelity funds) insider trades are informed. Theoretical studies of large informed traders suggest that their information advantage could be greater for buy trades than sell trades, be short- or long-lived, and be exploited by varying the pace of trade execution. Although there is evidence of each of these, Fidelity seems to be informed only for quickly executed buy trades. Other trades outperform a stock market index but not a four-factor return model. This performance profile is consistent with Fidelity's fees, which depend on performance compared to an index.

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