Can retail investors learn from insiders?

• Main Authors: BOEHMER, Ekkehart, SANG, Bo, ZHANG, Zhe
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2020
• Subjects: Retail order flow; Insider trading; Price discovery; Return predictability; Informed investors; Finance; Finance and Financial Management
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/6801; https://ink.library.smu.edu.sg/context/lkcsb_research/article/7800/viewcontent/BSZ_2022EFA.pdf
• Institution: Singapore Management University

This paper examines the trading patterns of retail investors following insider trading and the corresponding price impact. Retail investors follow the opportunistic purchases by insiders, but not their routine purchases. Neither investor attention nor common information such as earnings announcements or analysts forecast re- visions explains the results. They keep following insider purchases in subsequent four quarters. Moreover, for stocks with opportunistic insider purchases, those that retail investors bought yield higher cumulative abnormal returns than those that retail investors sold. The effect is mostly driven by the information compo- nent of the retail trades, rather than liquidity provision or temporary price pres- sure, and stronger for stocks with greater informational uncertainty and higher arbitrage costs. Variance ratio tests also suggest price efficiency improvements for stocks bought by retail investors following opportunistic insider purchases. The evidence is mostly consistent with retail investors learning from opportunistic insider purchases, and their trading helping expedite price discovery.