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7/29/2019 Lakonishok

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Siraprapa Watakit

5502310013

Are Insider Trades Informative?Lakonishok & Lee [2001]


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Agenda

Overview of The Paper

Contribution

Data and Data Summary

Trading and Reporting Periods Returns Aggregate Insider Trading and Market Returns

InsidersTrades and Cross-Sectional Variation in Stock Returns

Conclusion

2


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Overview of The Paper3

The paper aims at investigating whether the insider trading isinformative and how will the market reactto insider tradinginformation

Insiders are those people who are deemed to have more information

about company; such people are management, CEO or people who hold

substantial wealth of company(10%)

The activity of insiders are heavily demanded. it is still debatablewhether outsiders can profit from knowing

Some research say yes, and some say no How best to interpret these signals is the main objective of this

article.


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Contribution4

Using large data sample of insider trading, the paper presents

empirical result supporting the statement that insider trading IS

informative?

Insider trading gain profit from purchasing small stocks; no

evidence to support that there is profit gain on selling small stock

Even though outsider learn this information, trading small stock

is still costly, thus profit will be offset by transaction cost

Insider seems to have predictive/timing ability. The valuable

information is initially ignored by the market but later (6M later)realizing this information(market underreaction)


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Data5

Stock Exchanges: NYSE/AMEX and NASDAQ(Excludes: non-

common share, ETF, ADR, cheap stock


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Data Summary6

Table1:

Managers are most

active in Large Company

Manager sell >buy

LargeSH trade much

less often but

in much bigger volume

Insider activity is more pronounces in small company


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Data Summary7

Table 2

Overtime, managers wealth are in

company stock; in order to

diversify their wealth, sales are

expected to increase(from $2.6B to $23B)


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Trading and Reporting Periods Returns8

To study a market reaction, abnormal return are calculated at around thetime of insider trading reporting

Table 3

the abnormal returns around the reporting dates of insiders trades arenot economically meaningful and not related /w size

the abnormal returns around the trading dates of insiders trades aresomewhat larger in purchase and small stock


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Aggregate Insider Trading and Market Returns

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Seyhun(1988,1992,1998) shows thataggregate insider trading

significantly predicts future market movements

Methodology: Distinguish between contrarian strategy and insider

trading activity by using NPR Calculate NPR for each group in

each month during Jan/76 to Jan/95, then run regression

Net Purchase Ratio, a

measurement of insider activity

return of portfolio i which

includes no-inside trading stock

prior2y holding

period return

(control

contrarian)


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10

Table 41 on the left2 on the righ

1 is significant suggestinsider trading can gain

abnormal return

negative 2 on control

overstating insider tradingabnormal return

manager have more

predictive power than

large sh


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Figure 1

Crash

Before: Manager become a

heavy seller

After: Manager become a

heavy buyer


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Other statistics also show that

Insider trader are a better contrarian than outsider

Insider do not tend to buy when there is a large increase in

market return

Insiders were heavy buyers after poor performance of the market

Managers are more contrarian than large share holder


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InsidersTrades and Cross-Sectional

Variation in Stock Returns13

Insiders are definitely active in trading their own stocks, the next

question is will they have ability to predict to predict cross-sectional

variations in stock returns?

form portfolio based on NPR decile

Highest NPR port consist with small stock, Highes NPR portalso outperform Lowest NPR port

Purchase are more informative than sales

Highest NPR port is associated with poor past performance


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InsidersTrades and Cross-Sectional

Variation in Stock Returns14

Regression analysis crssectional regression

DPL and DSL dummy for strong purchase*/sale

signal


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Conclusion15

Insider trading activity is informative

to be more precisely, the activity is very informative on

purchasing side of the small stocks

Insider is a better contrarian

Manager is more contrarian than Large share holder

Market initially ignores the insider trading information at the

reporting period market is under-react

Insider have ability to time the market and to predict the trend of the

market in cross-section

Using daily/montgh data,we can learn about insider trading in a

longer period

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