Director discretion and insider trading profitability

Using a machine-learning algorithm, we classify over 60,000 director transactions into discretionary and non-discretionary purchases and sales based on the trading motive provided by the insider. We find that discretionary trades by company insiders are more informed than non-discretionary trades. F...

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Bibliographic Details
Published inPacific-Basin finance journal Vol. 39; pp. 28 - 43
Main Authors Foley, Sean, Kwan, Amy, McInish, Thomas H., Philip, Richard
Format Journal Article
LanguageEnglish
Published Elsevier B.V 01.09.2016
Subjects
Director discretion
Insider trading
Director discretion
Insider trading
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Summary:Using a machine-learning algorithm, we classify over 60,000 director transactions into discretionary and non-discretionary purchases and sales based on the trading motive provided by the insider. We find that discretionary trades by company insiders are more informed than non-discretionary trades. Further, discretionary purchases generate higher abnormal returns (1) for larger purchases, or when the purchase is for (2) the stock of a smaller firm, or (3) a firm with greater information asymmetry. •Separate director trades into discretionary and non-discretionary.•Discretionary trades earn higher returns.•This effect is strongest for purchases.•Returns are higher for larger trades.•Purchases in small firms earn higher returns.
ISSN:0927-538X
1879-0585
DOI:10.1016/j.pacfin.2016.05.005