Impact of managerial ability and firm-specific variables on insider’s abnormal returns

Abstract

The notion that corporate insiders trade on the basis of private information is well documented in extant literature. But, whether the depth and degree of abnormal gains depends upon their ability to predict future outcomes is unclear. In this study, we try to examine whether the ability of managers has any relation to abnormal gains on insider trades. This study also attempts to identify firm-specific variables that impact the abnormal returns on insider trades. In this study event, study methodology has been employed to calculate the abnormal returns on a sample of 1101 insider transactions over 197 companies. Data envelopment analysis has been used to measure the managerial ability. Regression results present that volume of trade, riskiness of security and managerial ability of insiders positively impacts the abnormal return on insider trades.