<p class="MsoNormal" style="text-align: justify; margin: 0in 40.3pt 0pt 0.5in; mso-pagination: none;"><span style="font-family: "CG Times","serif"; font-size: 10pt;">Investors often scrutinize stock trades by corporate insiders, hoping to infer the nature of any privileged information which may have motivated the trades. Conventional wisdom suggests that sales of stock by insiders reveal negative information; this interpretation is supported by empirical work such as the series of papers by Seyhun. However, this common interpretation fails to distinguish between sales by atomistic insiders and sales by controlling blockholders.<span style="mso-spacerun: yes;"> </span>In this paper, I present evidence which suggests that sales by controlling insiders should not be considered bad news. Using both a series of logit regressions and traditional event-study tests, I examine the relationship between a firm's performance and the willingness of its controlling shareholder to sell a significant proportion of his shares. I find that firm value is just as likely to rise on the news of large insider sales as it is to fall, so that large sales need not imply negative private information.<span style="mso-spacerun: yes;"> </span>One possible explanation for a positive response to a controlling blockholder's large sale is that such a sale makes the insider vulnerable to meaningful oversight by outside shareholders. Thus, a large sale may be a signal of the insider's willingness to expose himself to shareholder monitoring and discipline. However, regardless of the interpretation, the empirical evidence presented in the paper forces the conclusion that it is inappropriate to interpret all insider sales as bad news: insider sales occur in a variety of contexts, and creating buy/sell rules which ignore those contexts is simplistic and erroneous.</span></p>
Feedback Effects, Asymmetric Trading, and the Limits to Arbitrage
