Can Traders Beat the Market? Evidence from Insider Trades

Using the comprehensive trading data for the U.S. corporate insiders between 1993 and 2008, we document robust evidence that insiders are able to beat the market on average and achieve transaction prices superior to the volume-weighted average prices. This outperformance, ex-pressed as a positive trading alpha, remains after we control for trade di ¢ culty, insider reputation and the role rank of corporate insiders. After analyzing the time series patterns of portfolio returns to strategies of mimicking corporate insiders with abnormal trading alphas in the extreme quartiles, we conclude that insiders at the aggregate level resemble value in-vestors who act on long-term fundamental information, trade patiently and earn rents from providing liquidity. Moreover, it is a highly pro\u85table strategy for outside investors to mimic the trading decisions of insiders who have extremely positive abnormal trading alphas. The pro t from this mimicking strategy withstands the erosion from adjustments for standard pricing factors in the literature or adjustment for stock characteristics. JEL Classi\u85cations: G10, G1