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.
This finding suggests that the arrival of the insider trade reverses the price impact of order imbalances.
If insiders execute multiple trades during the day, what we measure as subsequent drift may actually be a contemporaneous reaction to a subsequent insider trade.
A rough breakdown of the insider trade size distribution indicates a slight skewness toward smaller sized trades.
4 Invest/Net provides data from all insider trade filings with the SEC in machine readable form.
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.
This section reports the results of four sets of empirical tests concerning the incidence and effect of insider trades following earnings announcements.