Working Paper: NBER ID: w22115
Authors: Itzhak Bendavid; Justin Birru; Andrea Rossi
Abstract: We study whether industry familiarity is an advantage in stock trading by exploring the trading patterns of industry insiders in their own personal portfolios. To do so, we identify accounts of industry insiders in a large dataset provided by a retail discount broker. We find that insiders trade firms from their own industry more frequently. Furthermore, they earn abnormal returns exclusively when trading own-industry stocks, especially obscure stocks (small, low analyst coverage, high volatility). In a battery of tests, we find no evidence of the use of private information. The results are most consistent with the interpretation that industry familiarity is an advantage in stock trading.
Keywords: industry familiarity; insider trading; stock performance; trading advantage; public information
JEL Codes: G11; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| industry familiarity (L68) | superior trading performance (G19) |
| insiders earn abnormal returns (G14) | trading their own industry stocks (G24) |
| insiders trade firms from their own industry more frequently (L14) | superior trading performance (G19) |
| obscure stocks with low analyst coverage (G24) | superior trading performance (G19) |
| insiders demonstrate stock-picking ability (G14) | superior trading performance (G19) |
| insider profits do not originate from trading ahead of earnings announcements (G14) | superior trading performance (G19) |
| insider profits do not originate from merger activities (G34) | superior trading performance (G19) |