Mar

30

 When I first started studying stocks and insider trading, I got a cold call from a broker touting a medical stock saying insiders were buying. A little research showed that all the executives got company large loans to buy stock, and the company was in trouble, right before they faced bankruptcy.

Then Indiana's biggest insurance company at the time through rapid acquisition, Conseco, CEO and Board, also seemed to buy just before any big announcement. But again, they got big loans to buy stock right when they got in trouble buying the mobile home lenders. I believe it was Greentree Financials, the first "big" financial failure due subprime 10 years before the crisis of the "big" financials, who were smarter than everybody else.

After these 2 experiences, one wonders, if this is a "hail mary" signal. When the board wants insiders to buy a synthetic call (buying the stock, in effect shorting their bonds by taking a loan), do the stock and their bonds underperform?

Any studies on this?

Henrik Andersson writes: 

The firm I work for just launched a product following insider transactions and the track record per insider for Sweden. The product was first back tested. Part of the conclusion for that back test were:

After studying over 140,000 insider transactions over the past 12 years in Sweden, we conclude that following insiders leads to excess returns on average, confirming the results of numerous academic studies. However, not all insiders were created equally: some company insiders have a much higher "hit ratio". Our analysis also confirms the limited value of sell transactions for generating excess returns on an individual stock basis, although the volume of insider selling on aggregate can be a useful alarm bell for market moves. Our analysis of Swedish insider transactions shows that insiders have on average earned an excess return on share purchases of 3.2%, 5.5% and 13.3% for 3, 6 and 12-month holding periods respectively. Insider purchases outperform the market 55% of the time, but there are large deviations in this "hit ratio" by company.

The log normal distribution of the returns of the insiders look normal but with the average return beating the market.


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