Following the literature, we define order imbalance as the net difference between buyer- and seller-initiated orders around an insider trade (we exclude insider trade itself from this computation).
The price and volume information of the 60 trades before and after each insider trade in relation to their corresponding prevailing bid-ask quotes is used to define three different order imbalance measures following Chordia, Roll, and Subrahmanyam (2005).
The dummy variables, Di, which are defined to be equal to one if the trade is an insider trade and zero otherwise, are multiplied with the augmented portion to estimate the difference in variable interactions between insider-informed trades and noninsider, or uninformed, trades
Conversely, if the order is from an insider, the net effect is significant and in the same direction as that of the insider trade.
We did not follow this approach since: (1) all firms are required to report quarterly earnings, (2) quarterly reporting lags are fairly stable, and (3) all reports by firms with at least one insider trade during 1984-9 are included in our sample.
1) Presumably, investors may benefit from knowledge of previous insider trades, and consistent with this, the financial press and investment advisors frequently provide information on insider trading activity.
If regulatory and corporate restrictions induce insiders to delay what otherwise would be profitable trades until after material news is disclosed, we would expect: (1) the incidence of insider trading will increase after earnings disclosure, (2) post-announcement insider buys (sells) will be preceded by positive (negative) abnormal stock returns, consistent with foregone trading profits, and (3) no systematic abnormal returns will follow post-announcement insider trades if public disclosure erodes managers' informational advantage.
We also find that post-announcement insider trades are associated with significant abnormal returns.
1997) (explaining that "under [the traditional theory of insider trading] a corporate insider trades in the securities of his own corporation on the basis of material, non-public information," but that "under the misappropriation theory [sections] 10(b) and Rule 10b-5 are violated whenever a person trades while in knowing possession of material, non-public information that has been gained in violation of a fiduciary duty to its source" (emphasis added)); Fridrich v.
W]hen an insider trades while in possession of material nonpublic information, a strong inference arises that such information was used by the insider in trading.
Seyhun (1988) found a significant relationship between the level of insider trading and aggregate market returns in the three-month interval following insider trades.
13 An analysis of the monthly sequence of insider trades for these portfolios (not reported here) indicates that the net purchasing persists over virtually the entire 24-month period prior to performance in period 2.