When an insider buys stock in their own company, that’s usually a sign of good stock performance coming. But what about when they sell legally? It depends on whether they sold the stock for a profit or a loss, according to a recent study.
In the past, it wasn’t always clear what it meant when an insider sold stock. Peter Kelly, an assistant professor of finance at Notre Dame’s Mendoza College of Business, noted that insider stock sales can happen for any number of reasons.
“You might sell because you think that you need to diversify your portfolio, or because of the fact that you need to pay for your kids’ education, or because you need to make a down payment on your house,” Kelly said in a statement. “So there are a lot of reasons why people could sell that would be unrelated to the company’s underlying financial information.”
Kelly looked at historical stock market data and found that some insider sales — when insiders sell the stock for a loss — can predict future returns. When such a sale takes place, the stock’s six-month return immediately after the sale is, on average, 188 basis points lower.
“Since selling a stock at a loss is painful, an investor who sells at a loss must have particularly negative information,” Kelly said. “And what you see is when stocks are sold at a loss, it predicts negative returns.”
Kelly also found that fund managers could improve their returns by buying stocks sold at a gain by company insiders, and selling stocks that insiders sold at a loss.