Do insiders get better at insider trades?

Corporate insiders should, in theory, be able to better time share purchases and sales in their companies. After all, they have inside information, which is why their trades are regulated and published. Lots of research has gone into the analysis of insider trades and while some studies show outperformance of insiders, other studies do not. But one question that has not been investigated is if insiders get better at their trades over time.

Ann Marie Hibbert and her colleagues have tried to check if insiders learn more about their companies over time and translate that into better insider trades. It turns out that the results are…mixed.

Looking at insider trades in the United States from 2003 to 2020, they found that the three months after an insider buys shares in an open market transaction (as opposed to acquiring shares through an option scheme) outperform the sector average by 2% (8.2% annualised) and by 4.4% in the year after the purchase. Meanwhile, insiders selling their shares create an outperformance of 0.5% in three months (1.8% annualised) and 0.3% after one year. Note that “outperformance” in this case means that the shares of the company of the insider have worse performance than the sector average.

So, there is some information in insider trades at least relative to sector average returns, though not necessarily vs. market returns. But the interesting result from that study is the heatmap shown below for open market purchases. The first time an insider buys shares, the outperformance is large. But her outperformance becomes smaller the more often an insider buys shares. It is as if insiders start to become less and less successful at predicting a spell of good performance of their business.

Average outperformance of insider open market purchases

Source: Hibbert et al. (2022)

Now compare this to the heatmap of insider sells. The more often insiders sell shares in the open market, the better they seem to get at timing underperformance.

Average outperformance of insider sales

Source: Hibbert et al. (2022)

For most investors, it is quite hard to check how many times an insider has bought or sold stocks in the company before. But as a rule of thumb, if a long-serving director starts to sell her stocks, investors should pay attention. These guys often have sold shares several times before and they seem to get better at spotting trouble ahead.