Investment intelligence from insider trading

by Hasan Nejat Seyhun

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. Given the extra costs and risks of an active trading strategy, 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.