Insider Selling on Public Information : Evidence from Competition with Short Sellers

This paper shows that insiders trade on public information just after earnings announcements. Using a sample of US stocks, we analyze insider trading in the context of short-selling activity and show that insiders sell significantly more often and more shares when short sellers are also highly active. Moreover, the speed of information dissemination is significantly higher when both insiders and short sellers sell intensively. Together, these findings imply that insiders' and short-sellers' signals are highly correlated. Previous literature has shown that short sellers possess superior information-processing skills that allow them to trade profitably after public-information releases. Our evidence suggests that insiders, just as short sellers, interpret publicly-available earnings news and sell when their stock is overpriced. Insiders tend to stop selling and even start buying when the stock is underpriced. Competition between the two types of informed traders increases the speed of information dissemination, which improves stock-market efficiency