The insider trading anomaly has been documented in the US stock market for more than 40 years. When there’s a consensus among insiders, returns are especially high. Former academicians Josef Lakonishok and Inmoo Lee, who now both work in the private sector, calculated insider trading returns from 1975 to 1995 and found 7.7% excess raw returns and 4.8% risk adjusted returns.
This type of result isn’t limited to the US markets. They also hold true in other parts of the world. For example, a 2003 study by Dutch scientists show evidence for the profitability of insider trading in the Netherlands.
Dutch insiders have been required to report their transactions on Euronext Amsterdam since April 1999, so the study is based on pretty recent insider trading data. Insiders appear to be contrarian investors in the Netherlands as well; they buy after negative returns and they sell after a positive performance. The study found that during the first 20 trading days after the transaction, insider purchases returned 2.23% and insider sales returned -1.91%. These abnormal returns are statistically significant.
But the buy and hold abnormal returns are more significant. The portfolio of insider purchases had a cumulative excess return of 11.3% after 6 months, whereas the portfolio of insider sales had -2.4% in excess returns during the same time period. However, these results were in comparison to the total market returns and didn’t adjust for size or value effects. When the authors adjusted these two effects, the abnormal return of the purchase portfolio dropped to 8.0% but the abnormal return of insider sales portfolio increased to -7.3%. The results were also based on a 6 month holding period, and the annualized abnormal returns were in double digits.