Insider filings as trading signals — Does it pay to be fast?

Highlights

• First analysis of USD returns of outside investors copying insider trades.
• Positive abnormal percentage returns, but negative USD returns.
• Returns negatively correlated with stock liquidity.
• Limited arbitrage negating profitable and scalable trading strategy.

Abstract

We test a trading strategy based on SEC Form 4 insider trading filings in the post Sarbanes–Oxley Act period. Using intraday data, we analyze whether a prompt reaction to the announcement would earn abnormal returns. We find positive but lower abnormal percentage returns than in previous studies for short holding periods, but they vanish and even become negative when limiting the tradable dollar amount for each trading signal to a reasonable size. Moreover, we find that the returns in our setup are negatively correlated with stock liquidity, almost negating a potentially profitable and scalable trading strategy even before considering transaction costs.