Newspaper article THE JOURNAL RECORD

Impersonating the Insiders: Yes, It Pays

Newspaper article THE JOURNAL RECORD

Impersonating the Insiders: Yes, It Pays

Article excerpt

Do they or don't they? Do corporate insiders -- like company directors and officers -- know so much more than we do about their company's prospects that we can beat the market simply by imitating their purchases and sales?

Opinion varies widely on this question, partly because researchers themselves have changed their minds. The initial answers came more than 30 years ago, in several academic studies that found that investors could beat the market simply by buying the stocks that insiders were buying.

Particularly compelling was the fact that unlike some other strategies, this one was so easy to practice. The Securities and Exchange Commission requires insiders to report their purchases and sales, and several investment newsletters translate that data into investor-friendly formats. The strategy was the conventional wisdom for many years. But serious doubts were raised in the 1980s, when researchers found that the insiders of small-capitalization companies were more likely to buy their companies' shares than were the insiders of larger companies. And they found that insiders of value-oriented companies - - defined as those trading at the lowest price-to-book ratios -- were more likely to buy than those of growth-oriented companies. That research placed the earlier studies in a very different light. It meant that those landmark studies from the 1960s might have discovered little more than the long-term tendency for small- cap stocks to outperform large-cap stocks, and for value stocks to outperform growth stocks. The upshot of the newer research was that if your portfolio was already concentrated in small-cap value stocks, you gained no advantage from paying attention to insiders. That new consensus also lasted for some years. But it, too, has come under fire, as a number of researchers have looked into whether the patterns have endured. In fact, they have found several wrinkles. One study, circulating as a working paper, was conducted by Leslie Jeng, an associate professor of finance and economics at Boston University, and Andrew Metrick and Richard Zeckhauser, an associate professor of economics and a professor of political economy at Harvard. …

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