Dissecting the Relation between Insider and Institutional Trading
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This dissertation consists of two essays. In the first essay, we examined the relation between insider trades and institution demand. The literature documents a strong inverse relation between insider trading and institutional demand, suggesting that institutions provide liquidity for insider trading. Motivated by empirical evidence that there is considerable variation of informativeness among institutions and insiders, this paper further examines the relation between insider trading and institutional trading by classifying insiders as opportunistic vs. routine traders and institutions as short-term vs. long-term investors. We find that the inverse relation between insider trading and institutional demand is mainly driven by long-term institutions. In fact, short-term institutions tend to trade in the same direction as opportunistic insiders whose trades are more informative of future stock price changes. The results are stronger for trades on small cap stocks. Further separating officers and directors vs. other insiders, we show that our findings are driven primarily by trades from opportunistic officers and directors. In the second essay, we examined how the institutional investors, short sellers, and insiders response to earnings announcement. Institutional investors, short sellers, and insiders are perceived as informed and play an important role of incorporating information into asset prices through their trades. In this paper, using daily trades of these investors, we examine how they trade on earnings news and, more importantly, whether their trades prior to earnings announcements are informative of earnings surprises. Our results show that during the earnings announcement window, institutions trade in the same direction of earnings surprises and earnings announcement returns, short sellers’ trades have an insignificant relation with earnings surprises or earnings announcement returns, whereas insiders trade in the opposite direction of earnings surprises and earnings announcement returns. Interestingly, prior to earnings announcements, only short sellers trade in the correct direction of earnings announcement returns, insiders’ trades are uninformative of earnings surprises, institutions mostly trade in the opposite direction of earnings announcement returns.