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Relative idiosyncratic volatility and the timing of corporate insider trading

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  • Gider, Jasmin
  • Westheide, Christian

Abstract

This paper investigates whether corporate insiders trade when asymmetric information is high, using data on U.S. corporate insider transactions between 1986 and 2012. We generalize the literature focusing on insider trading around the announcement of different categories of corporate events. The key innovation of this paper is our asymmetric information proxy relivol, which measures deviations of idiosyncratic volatility from a firm's normal level. Our findings suggest that relivol positively predicts insider purchases, indicating that insiders buy shares when their informational advantage is high. However, insiders appear to sell less when relivol is high, which is consistent with existing evidence on sales being driven by alternative, non-information-related trading motives such as liquidity or diversification needs. Furthermore, we find that profits are significantly higher when insiders buy during periods of high relivol but not when they sell shares.

Suggested Citation

  • Gider, Jasmin & Westheide, Christian, 2016. "Relative idiosyncratic volatility and the timing of corporate insider trading," Journal of Corporate Finance, Elsevier, vol. 39(C), pages 312-334.
    • Handle: RePEc:eee:corfin:v:39:y:2016:i:c:p:312-334
    DOI: 10.1016/j.jcorpfin.2016.04.008
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    3. Caporale, Guglielmo Maria & Kyriacou, Kyriacos & Spagnolo, Nicola, 2023. "Aggregate insider trading and stock market volatility in the UK," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 89(C).
    4. Rahman, Dewan & Oliver, Barry & Faff, Robert, 2020. "Evidence of strategic information uncertainty around opportunistic insider purchases," Journal of Banking & Finance, Elsevier, vol. 117(C).
    5. Fabio Pizzutilo, 2017. "Measuring the under-diversification of socially responsible investments," Applied Economics Letters, Taylor & Francis Journals, vol. 24(14), pages 1005-1018, August.
    6. Vo, Xuan Vinh, 2017. "Do foreign investors improve stock price informativeness in emerging equity markets? Evidence from Vietnam," Research in International Business and Finance, Elsevier, vol. 42(C), pages 986-991.
    7. Liu, Xiaojun & Wang, Li & Dai, Yunhao, 2023. "Capital market liberalization and opportunistic insider sales: Evidence from China," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 82(C).
    8. Claire Y.C. Liang & Zhenyang Tang & Xiaowei Xu, 2020. "Return Synchronicity and Insider Trading Profitability," International Review of Finance, International Review of Finance Ltd., vol. 20(4), pages 857-895, December.
    9. Dang, Chongyu & Foerster, Stephen & Li, Zhichuan (Frank) & Tang, Zhenyang, 2021. "Analyst talent, information, and insider trading," Journal of Corporate Finance, Elsevier, vol. 67(C).
    10. Cline, Brandon N. & Posylnaya, Valeriya V., 2019. "Illegal insider trading: Commission and SEC detection," Journal of Corporate Finance, Elsevier, vol. 58(C), pages 247-269.
    11. Gow-Cheng Huang & Kartono Liano & Ming-Shiun Pan, 2023. "Open-market stock repurchases, insider trading, and price informativeness," Review of Quantitative Finance and Accounting, Springer, vol. 60(4), pages 1495-1513, May.
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    13. Neupane, Biwesh & Thapa, Chandra & Marshall, Andrew & Neupane, Suman, 2021. "Mimicking insider trades," Journal of Corporate Finance, Elsevier, vol. 68(C).

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    More about this item

    Keywords

    Insider trading; Information asymmetry; Idiosyncratic volatility;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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