Working Paper: NBER ID: w24801
Authors: Huaizhi Chen; Lauren Cohen; Umit Gurun; Dong Lou; Christopher Malloy
Abstract: Using a novel database that tracks web traffic on the SEC’s EDGAR server between 2004 and 2015, we show that institutional investors gather information on a very particular subset of firms and insiders, and their surveillance is very persistent over time. This tracking behavior has powerful implications for their portfolio choice, and its information content. An institution that downloaded an insider-trading filing by a given firm last quarter increases its likelihood of downloading an insider-trading filing on the same firm by more than 41.3% this quarter. Moreover, the average tracked stock that an institution buys generates annualized alphas of over 12% relative to the purchase of an average non-tracked stock. We find that institutional managers tend to track members of the top management teams of firms (CEOs, CFOs, Presidents, and Board Chairs), and tend to share educational and location-based commonalities with the specific insiders they choose to follow. Collectively, our results suggest that the information in tracked trades is important for fundamental firm value and is only revealed following the information-rich dual trading by insiders and linked institutions.
Keywords: Institutional investors; Portfolio choice; Insider trading; Information tracking
JEL Codes: G02; G11; G14; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| institutional investors who downloaded an insider trading filing from a particular firm in the previous quarter (G14) | institutional investors who download a filing from the same firm in the current quarter (G24) |
| stocks tracked by institutions (G23) | annualized alphas of over 12% compared to non-tracked stocks (G11) |
| an institution's buy following a tracked insider buy (G14) | risk-adjusted alpha of 300 basis points per quarter (G11) |
| an institution's sell following a tracked insider sell (G14) | underperformance of 190 basis points per quarter (G31) |