Seyhun (1998)

Reference

Investment Intelligence from Insider Trading^aaa

H. Nejat Seyhun

MIT Press, (1998).

Synopsis

This book provides a comprehensive and accessible synthesis of the returns to trading strategies based on insider trading reports. The 'base-case' annual hedge portfolio return to a strategy of going long in stocks with insider purchases in the most recent month and going short in firms with insider sales in the most recent month is just over 7%. Several refinements to this basic strategy result in substantially higher returns. The most important refinements are ignoring passive transactions (transactions that close previously opened positions), focusing on transactions that are not preceded by conflicting signals (e.g., insider buys that are not preceded by any insider sells in last 12 months), focusing on transactions by knowledgeable insiders (e.g., focusing on top executive trades and ignoring large shareholder trades), focusing on large transactions (e.g., 1,000 shares or more) and focusing on transactions in small firms (e.g., market cap less than $1 billion). Strategies incorporating these refinements generate annual hedge portfolio returns in the range of 10-25%.