Do Managers Exploit Private Information about Their Firm’s Investor Base?

I investigate whether managers exploit private information about who is buying and selling their firm’s stocks. To do so, I examine insider trading prior to activist investors’ disclosure of Schedule 13Ds. Schedule 13Ds are required when investors have acquired more than 5% of a firm’s shares, and they cause a significant price jump of approximately 6% upon disclosure. I document that insider purchases (sales) are abnormally high (low) in the days before Schedule 13D disclosures. Cross-sectionally, pre-disclosure insider net purchases are higher when the Schedule 13D filer is hostile or a significant activist investor, and when they make larger trades to accumulate their shares. Finally, I find that pre-disclosure insider trading is predictive of a firm’s future stock and operating performance. Overall, my results show that managers obtain private information concerning their firm’s investor base and exploit it for personal gain and signaling purposes