Getting the inside track: The effect of CEO ownership and wealth on insider trading returns

Abstract: This paper analyzes the market reaction to insider transactions by CEOs in Swedish companies and if a CEO's ownership in her company, wealth and magnitude of change in shareholding have an effect on the market reaction. Moreover, we analyze how outside investors can benefit from mimicking CEOs' insider transactions. We present five major findings. First, CEOs trade on superior information and earn average abnormal returns of 1.46% and 1.35% for purchases and sales respectively over the first five days following the transaction. Second, a higher change in shareholding due to the transaction leads to higher abnormal returns. Third, a higher ownership stake reduces the magnitude of abnormal returns. Fourth, a CEO's affected wealth has no significant effect on the magnitude of abnormal returns for CEOs in the short-term, but in the long-term. Finally, outside investors can benefit from mimicking CEO insider transactions in Sweden. In particular, mimicking CEO purchases in which at least 10% of a CEO's wealth is affected leads to abnormal returns of 81 basis points per month, when controlling for size, market-to-book and momentum.