Insider trading and information flows : a cause for concern? : an empirical analysis of the Norwegian market

Abstract

This paper examines the returns to the aggregate portfolio of insider trades in Norway and the connection between insider trading and the asset management industry during the period January 2008 until July 2012. I find strong evidence that the aggregate insider does not earn abnormal returns, but instead realises inferior returns relative to non-insiders. This result is attributed to a number of different factors including that insiders often trade purely for liquidity or diversification purposes; there is evidence that insiders follow contrarian investment strategies; and insiders are subject to a number of behavioural biases. Extending the study of insider trades to the asset management industry I find that Norwegian mutual funds affiliated with a financial conglomerate significantly outperform non-affiliated funds, and substantial evidence that insider trades, and hence information flows, can account for this difference in performance. These findings are in general robust to both the estimation method and the model used for the analysis, and have important implications for insider trading and the asset management industry.