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Decoding Inside Information

LAUREN COHEN, CHRISTOPHER MALLOY and LUKASZ POMORSKI
The Journal of Finance
Vol. 67, No. 3 (JUNE 2012), pp. 1009-1043
Published by: Wiley for the American Finance Association
Stable URL: http://www.jstor.org/stable/23261332
Page Count: 35
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Decoding Inside Information
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Abstract

Exploiting the fact that insiders trade for a variety of reasons, we show that there is predictable, identifiable "routine" insider trading that is not informative about firms' futures. A portfolio strategy that focuses solely on the remaining "opportunistic" traders yields value-weighted abnormal returns of 82 basis points per month, while abnormal returns associated with routine traders are essentially zero. The most informed opportunistic traders are local, nonexecutive insiders from geographically concentrated, poorly governed firms. Opportunistic traders are significantly more likely to have SEC enforcement action taken against them, and reduce trading following waves of SEC insider trading enforcement.

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