Informativeness of Reported Insider Trades: Evidence from the Swedish Stock Market

Abstract: This paper examines the informativeness of reported insider trades on the Stockholm Stock Exchange for abnormal returns over the period of 2004 to 2017. The paper evaluates whether outside investors can earn long-term abnormal returns by investing in firms with net insider buying. We find that a portfolio investing in firms with monthly net insider buying and holding them for 24 months earns an abnormal return of 1.36 percent per annum, though transaction costs may reduce the return to an insignificant amount. In addition, we find that the trades of chief executive officers signal higher abnormal returns than the trades of other insiders, and that the very largest insider purchases signal significant negative abnormal returns, as these purchases are usually motivated by control motives. Firm size does not affect abnormal returns. Using a three-month holding period, a strategy that ignores firms with the most intense insider buying and invests in firms with net buying earns an annual return of 21.56 percent and an abnormal return of 5.49 percent per annum.