Insider Transactions – Myth Buster
Have you ever been heard how insider sales are meaningless while insiders buying can only mean one thing? The story goes that the only reason insiders buy is they expect the share price to increase while sales can be for a variety of reasons, e.g. a new house, kids college, taxes etc etc. That makes intuitive sense and I’ve often seen that story repeated, especially when an investor in nervous about insider sales.
Well it turns out that the reverse is true. Academic studies in America and Australia show that their are limited abnormal returns gained after insiders buy, yet insiders do sidestep abnormal negative returns with their sales. Further investors can also on average earn abnormal returns by following suit when the insider sales are publicly disclosed. Keep in mind we’re talking averages here. So please don’t go selling your shares the next an insider in one of your companies unloads a few shares. Though perhaps it is worth keeping this in mind the next time you see large insider sales. It may be a good trigger to dig deeper and ponder whether that company is the best place for your funds.
The following graphs are based on a study by Uylangco, Easton and Faff (2010). They concluded “imitators may earn small abnormal returns by imitating directors, especially with respect to sales.”
Related posts:
Leave your response!